Analysis of Application of Fama-French 3-factor Model and Fama-French 5-factor Model in Manufacture Industry and Health Industry

Abstract

Fama French three-factor and Fama French five-factor models are important models for explaining stock returns and finding risk factors. This study mainly includes the analysis of the coefficients of the two models to evaluate which model has a higher explanatory power and determine the influence factors for the manufacturing industry and health industry through comparison. The linear regression method is adopted to calculate the coefficients for the Fama French three factors and five factors, thereby exploring the risk factors and development potential of the two industries. Based on the comparison of the results of the coefficients of the two industries, the results indicate that 1) the manufacturing industry is more sensitive than the health industry to the fluctuations of the market economy; 2) the overall market of the health industry tends to favor large-scale enterprises while the manufacturing industry favors small-scale enterprises; and 3) the health industry has a lower book-to-market ratio, but enjoys a better development prospect than the manufacturing industry. Therefore, through the results of the analysis of the three factors and the performance of the overall market, it is concluded that the health industry is more favorable for investment at the present stage of economic and technological level.