Is the Fama French Three-Factor Model Relevant? Evidence from Islamic Unit Trust Funds

Shaharuddin, Shahrin Saaid and Lau, Wee Yeap and Ahmad, Rubi (2018) Is the Fama French Three-Factor Model Relevant? Evidence from Islamic Unit Trust Funds. The Journal of Asian Finance, Economics and Business, 5 (4). pp. 21-34. ISSN 2288-4637

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Official URL: https://doi.org/10.13106/jafeb.2018.vol5.no4.21

Abstract

The study tests the Fama and French three-factor model by using the newly created Islamic equity style indices. Based on a dataset from May 2006 to April 2011, the three-factor model is tested based on returns of Islamic unit trust funds using the Generalized Method of Moments (GMM) methodology. The sample period is also divided between periods before and after the Global Financial Crisis in August 2008 to test for robustness, and the Bai and Perron (2003) multiple structural break test was used to determine the structural break in the series. The analysis shows that the Fama and French model is valid for Islamic unit trust funds before and after the collapse of Lehman Brothers. The result further indicates the reversal of size effect. As for trading strategies, value funds outperform growth funds by annualized 3.13 percent for the full period. During pre-crisis period, value funds perform better than growth funds while in post-crisis, size factor yields better return than other strategies. As policy suggestion, fund managers need to be aware of the reversal of size effect, and they need to ensure a more transparent stock selection process so that investors can make an informed decision in their asset allocation.

Item Type: Article
Uncontrolled Keywords: Unit Trust Funds; Equity Style; Fama and French; Islamic Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HF Commerce
Divisions: Faculty of Economics & Administration
Faculty of Business and Accountancy
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 18 Mar 2019 04:49
Last Modified: 18 Mar 2019 04:49
URI: http://eprints.um.edu.my/id/eprint/20721

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