An empirical test of the select multifactor asset pricing models with GMM

Abstract

This study focuses on the empirical testing of the two multifactor asset pricing models, namely, the Fama-French three-factor and Carhart four-factor models in the Indian capital market. The study builds on the constituent stocks of the Nifty 500 index to have an adequate representation of the Indian market. The study employs the generalised method of moments (GMM) to address the problem of endogeneity, and to have the consistent estimates. The results show that the four-factor model explains the cross-section of expected stock returns better than the three-factor model. However, the momentum factor is not significant for a majority of the periods of the study.