Testing the validity of Fama-French Three Factor Model on Indian Stock Market

This paper studies the financial performance of Indian Stocks by implementing the Fama French Three Factor model to 30 stocks of the Bombay Stock Exchange using daily Stock (closing) data with SENSEX as the benchmark Index. The main objective of this study is to test the ability of the Fama-French three factor model to explain the variation in stocks rate of return over the period from April 2005 to March 2015. This thesis uses models to analyze data from BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 by taking daily closing prices of stocks which are listed on SENSEX, the study also investigates the existence of the size and value effects. The study found a strong size and strong positive value effects in testing. The study results indicated that the Fama & French three factor model provide better explanation to the variation in stocks rates of return than the CAPM. The study also suggests that besides the three factors suggested by the Fama and French, there must be factors that account for the Sector performance.