Abstract

Fama-French three-factor model indicates the main factors affecting the stock returns for the market factor, the size factor and the book-to-market ratio factor, but did not specify the relative weights of the three factors and what sub-factors make an impact on the three factors. Therefore, in this article, we explore the part that the Fama-French three factor model does explain. By applying the multiple criteria decision making which contains the decision making trial and evaluation laboratory and the analytic network process, we create a network of models and confirm the relationship among these factors based on the model results. The result shows that the three factors have interaction and self-feedback. In the nine evaluation criteria, the price, followed by market returns and dividend growth rate, is the most important factor that affects the stock returns. This result not only confirms the second factor of the Fama-French three-factor model, but also finds out the relative weight of factors.

Key words: Multiple criteria decision making, decision making trial and evaluation laboratory, analytic network process.