Evidence to support the four-factor pricing model from the Canadian stock market

• Published in: Journal of international financial markets, institutions & money institutions & money, 2004-10, Vol.14 (4), p.313-328
• Main Authors: L’Her, Jean-François, Masmoudi, Tarek, Suret, Jean-Marc
• Format: Article
• Language: English
• Subjects: Canada; Canadian stock market; Finance; Four-factor pricing model; International finance; International monetary relations; Price models; Pricing; Stock exchange
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2003.09.001

This paper tests the Fama-French three-factor pricing model augmented by a momentum factor on the Canadian stock market. Using Fama-French’s methodology to construct the risk factors, the average annual premium obtained for the market, size, book-to-market and momentum risk factors are, respectively, equal to 4.52, 5.08, 5.09 and 16.07%, over the July 1960–April 2001 period. The results relative to the three zero-investment portfolios are in line with those obtained by Liew and Vassalou [Journal of Financial Economics 57 (2000) 221] for the 1976–1996 period, even though the authors use sequential sorts to construct the risk factors. The main evidence of regularities in factors’ behavior are as follows: the size factor returns are substantially greater in January than in other months, whereas the momentum factor returns are always significant, except in January. Book-to-market factor returns are positive (negative) and highly (barely) significant in down-markets (up-markets). Lastly, regarding conditioning on the monetary policy environment, we find that the SMB and HML premiums are only significant in an expansive environment.