A comparison between the fame and french three factor model and the lcapm model in the brazilian stock market

Abstract

Sharpe and Lintner's CAPM model has been widely used in predicting returns in stock markets, however, it suffers from many criticisms in relation to its applicability. In this study, we sought to study how the LCAPM model, studied by Minovic and Zivkovic (2014) in the Croatian stock market, behaved in the Brazilian stock market. For this, comparisons were made with the models of Fama and French (1993) and the CAPM (1964). The methodology used was descriptive statistics, in which nine portfolios were formed, as Fama and French (1993) used. To measure the expected return on portfolio i, multiple regressions in a time series were used, with the monthly returns of the portfolios constructed as the dependent variable, minus the risk-free rate, in this case the Selic, and as independent variables the premium for market risk, measured by beta, the size factor and the liquidity factor. The presented results demonstrated that according to the studies by Hearn, Piesse and Strange (2010) and Minovic and Zivkovic (2014), the LCAPM model presented a superior performance to the traditional CAPM and to the three-factor model of Fama and French (1993).