Constructing and testing alternative versions of the Fama-French and Carhart models in the UK

Abstract

This paper constructs and tests alternative versions of the Fama-French and Carhart models for the UK market with the purpose of providing guidance for researchers interested in asset pricing and event studies. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. We find that versions of the four-factor model using decomposed and value-weighted factor components are able to explain the cross-section of returns in large firms or in portfolios without extreme momentum exposures. However, we do not find that risk factors are consistently and reliably priced.