Asset Pricing and Cost of Equity for US Banking Sector by CAPM and TFPM from 1987-2011

Although Capital Asset Pricing Model (CAPM), one-factor model, has strong theoretical basis and is easy to use and understand, analysts also consider other alternative models, such as Three Factor Pricing Model (TFPM) developed by Fama and French (1993). Because some differences between actual return and estimated return could be explained by the effect of capital size and book-to-market ratio. The objective of using these two similar but complementary models is to estimate the cost of equity for the US banking sector. In order to do the estimation, we would conduct the estimation of parameters for both individual bank and the whole banking sector.