An Empirical Test of the Three-factor Model: The Ghanaian Case

This paper studied the applicability of the Fama and French (1993) three-factor model to stocks on the Ghana Stock Exchange by employing the Fama and Macbeth (1973) two-pass methodology and the generalised method of moments (GMM). For the time series results, the joint GRS test of the model supports the efficiency of the three-factor model in explaining the average pattern of the stock returns. For the cross-section results, only the size factor is significant and negatively priced. The results are robust to two styles of portfolio formation approaches and similar when the GMM approach is used. The study has the implication that investors on the exchange, among others, need to take into account the peculiar characteristics of the Ghanaian market for investment purposes given the background that the formation of well-diversified portfolios using stocks listed on the exchange is a challenge.