Are the Fama-French factors proxying default risk?
AuthorGharghori, P; Chan, H; Faff, R
Source TitleAustralian Journal of Management
PublisherUNIV NEW SOUTH WALES, AUSTR GRAD SCH MANAGEMENT
University of Melbourne Author/sChan, Howard
Document TypeJournal Article
CitationsGharghori, P., Chan, H. & Faff, R. (2007). Are the Fama-French factors proxying default risk?. AUSTRALIAN JOURNAL OF MANAGEMENT, 32 (2), pp.223-249. https://doi.org/10.1177/031289620703200204.
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C1 - Refereed Journal Article
In this paper we investigate the contention that the Fama-French (1993) model's ability to explain cross-sectional variation in equity returns occurs because the Fama-French factors, SMB and HML, are proxying for default risk. To assess the default risk hypothesis, we augment the CAPM and the Fama-French model with a default factor and run system regressions of the default enhanced models using the GMM approach. Our key findings are that: 1) default risk is not priced in equity returns; and, 2) the Fama-French factors are not proxying for default risk. Although our findings suggest that SMB and HML are not proxying for default risk, our analysis indicates that the Fama-French factors are capturing some form of priced risk However, what type of risk the Fama-French factors are capturing remains an open question.
KeywordsBanking; Finance and Investment
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