An empirical investigation of the Fama-French five-factor model
-
DOIhttp://dx.doi.org/10.21511/imfi.17(1).2020.13
-
Article InfoVolume 17 2020, Issue #1, pp. 143-155
- Cited by
- 1825 Views
-
1134 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The article deals with evaluating the securities portfolios in the process of transition from the one-factor CAPM model to the Fama-French five-factor model (FF5F). It identifies the advantages of the latter and discusses the controversial issues regarding its use by portfolio investors in different countries, given the anomalies inherent in asset pricing. Besides, the peculiarities of the statistical stratification method used in the FF5F model to group stock portfolios are revealed, and attention is drawn to some of the debating points of the five-factor model. The proposals have been formulated, which offer broader avenues for taking advantage of the FF5F model and increase the validity of the portfolio analysis results. The article also gives recommendations on modifying the approaches to analyzing small-size portfolios versus big-size portfolios based on partial changes in RMW and CMA factors, threshold proportions, and the use of STARR for asymmetric portfolios. The study substantiates the use of these approaches in testing the Fama-French five-factor model with portfolios composed of blue chips.
- Keywords
-
JEL Classification (Paper profile tab)C19, G11, G12
-
References29
-
Tables8
-
Figures2
-
- Figure 1. Share allocation across big-size portfolios
- Figure 2. Share allocation across small-size portfolios
-
- Table 1. Changes in approaches when using the FF5F model
- Table 2. Small-size and big-size portfolios according to the modified approach
- Table 3. Multiple linear regression results
- Table 4. Parameter estimates of the FF5F model
- Table 5. Summary results
- Table A1. ANOVA results for the BtM group portfolios
- Table A2. ANOVA results for the RMW group portfolios
- Table A3. ANOVA results for INV group portfolios
-
- Banz, R. (1981). The Relationship between Return and Market Value of Common Stocks. Journal of Financial Economics, 9(1), 3-18.
- Basu, S. (1977). Investment Performance of Common Stocks in Relation to their Price-Earnings Ratios: a Test of the Efficient Market Hypothesis. Journal of Finance, 32(3), 663-682.
- CFA Institute. (2019). Fixed Income and Equity Portfolio Management: CFA Institute Program.
- Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57-82.
- Chiah, M., Chai, D., Zhong, A., & Li, S. (2016). A Better Model? An Empirical Investigation of the Fama–French Five-Factor Model in Australia. International Review of Finance, 16(4), 595-638.
- Darushin, I. A., Lvova, N. A., Ivanov, V. V., & Voronova, N. S. (2016). The Russian stock market: Is it still efficient? In Proceedings of the 27th International Business Information Management Association Conference – Innovation Management and Education Excellence Vision 2020: From Regional Development Sustainability to Global Economic Growth, IBIMA 2016 (pp. 818-828).
- Dutta, A. (2019). Does the Five-Factor Asset Pricing Model Have Sufficient Power? Global Business Review, 20(3), 684-691.
- Fama, E., & French, K. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33(1), 3-56.
- Fama, E., & French, K. (1995). Size and Book-to-Market Factors in Earnings and Returns. Journal of Finance, 50(1), 131-155.
- Fama, E., & French, K. (1998). The Corporate Cost of Capital and the Return on Corporate Investment (CRSP Working Paper).
- Fama, E., & French, K. (2002). The Equity Premium. Journal of Finance, 57, 637-659.
- Fama, E., & French, K. (2014). A Five-Factor Asset Pricing Model (Fama-Miller Working Paper).
- Fama, E., & French, K. (2015). A Five-Factor Asset Pricing Model. Journal of Financial Economics, 116(1), 1-22.
- Fama, E., & French, K. (2016). Dissecting Anomalies with a Five-Factor Model. Review of Financial Studies, 29(1), 69-103.
- Fama, E., & French, K. (2017). International Tests of a Five-Factor Asset Pricing Model. Journal of Financial Economics, 123(3), 441-463.
- Guo, B., Zhang, W., Zhang, Y., & Zhang, H. (2017). The Five-Factor Asset Pricing Model Tests for the Chinese Stock Market. Pacific-Basin Finance Journal, 43, 84-106.
- Hapsari, C., & Wasistha, G. (2018). Portfolio formation using the Fama-French five-factor model with modification of a profitability variable: An empirical study on the Indonesian stock exchange. In L. Gani, B. Gitaharie, Z. Husodo, & A. Kuncoro (Eds.), Competition and Cooperation in Economics and Business (pp. 83-88).
- Haugen, R., & Baker, N. (1996) Commonality in the Determinants of Expected Stock Returns. Journal of Financial Economics, 41(3), 401-439.
- Huynh, T. (2018). Explaining Anomalies in Australia with a Five-factor Asset Pricing Model. Іnternational Review of Financе, 18(1), 123-135.
- Ivanov, V., Lvova, N., Pokrovskaia, N., Nurmukhametov, R., Naumenkova, S. (2019). Increasing the financial depth of the Russian economy: Does it stimulate investment activity? In Proceedings of the 33rd International Business Information Management Association Conference, IBIMA 2019: Education Excellence and Innovation Management through Vision 2020 (pp. 2747-2759).
- Ivanov, V., Mishchenko, V., & Maliutin, O. (2015). Іnternational Experience of Inflation Targeting: Model of Success for Ukraine. Actual Problems of Economics, 166(4), 414-425.
- Mishchenko, S., Naumenkova, S., Mishchenko, V., Ivanov, V., & Lysenko, R. (2019). Growing Discoordination between Monetary and Fiscal Policies in Ukraine. Banks and Bank Systems, 14(2), 40-49.
- Mishchenko, S., & Mishchenko, V. (2016). Combining the Functions of Strategic Development and Crisis Management in Central Banking. Actual Problems of Economics, 2(176), 266-272.
- Ozkan, N. (2018). Fama-French Five Factor Model and the Necessity of Value Factor: Evidence from Istanbul Stock Exchange. Press Academia Procedia (PAP), 8, 14-17.
- Paliienko, О. (2019). Comparative analysis of theoretical approaches of stocks return valuation of companies. Regional Economics and Management, 3(25), 39-46.
- Qi, L. (2017). Noisy Prices and the Fama-French Five-Factor Asset Pricing Model in China. Emerging Market Review, 31, 141-163.
- Racicot, F.-E., Rentz, W., & Théoret, R. (2018). Testing the New Fama and French Factors with Illiquidity: a Panel Data Investigation. Finance, 39(3), 45-102.
- Thomson Reuters. (n.d.). Official website.
- Zaremba, A., & Czapkiewicz, A. (2017). Digesting Anomalies in Emerging European Markets: A Comparison of Factor Pricing Models. Emerging Markets Review, 31, 1-15.