Abstract
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.
Published Version
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