Non-nested tests of a GDP-augmented Fama-French model versus a conditional Fama-French model in the Australian stock market

Robert Faff, Philip Gharghori*, Annette Nguyen

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

We extend Vassalou (2003) by conditioning the Fama-French model with the same macroeconomic variables used to construct a GDP factor. The motivation for doing so is to ascertain whether the ability of the GDP-augmented model to explain equity returns is actually due to news about future GDP growth or whether it is due to the macroeconomic conditioning variables used to construct the GDP factor. We compare the performance of a GDP-enhanced Fama-French model with the conditional Fama-French model using non-nested testing techniques. We find that the GDP-augmented model considerably underperforms the conditional version of the model.

Original languageEnglish
Pages (from-to)627-638
Number of pages12
JournalInternational Review of Economics and Finance
Volume29
DOIs
Publication statusPublished - Jan 2014
Externally publishedYes

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