Constructing Fama-French Model from Russell/Nomura Style Indexes: Japanese Evidence
Constructing Fama-French Model from Russell/Nomura Style Indexes: Japanese Evidence

Summary/Abstract: In this paper we use risk factors constructed from Russell/Nomura style indexes in an attempt to make the Fama and French (FF) three-factor model more appealing, which is new to the existing literature. The newly constructed size and Book-to-Market (BM) risk factors made from style indexes possess similar features to those used in previous literature. The performance of Fama and French (FF) asset pricing model based on the proxy factors is evaluated through a direct and simple generalized method of moments (GMM) test of 33 industry indexes from Tokyo Stock Exchange First Section, JASDAQ, Hercules, and other exchanges. The over-identifying restrictions test statistics could not reject the FF model with any industry. Also, the estimated risk factor premiums brought further support to the use of FF model with risk factors constructed from style indexes.

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