Analysis of COVID-19 on Service Industry Based on Fama and French Five-Factor Model

Abstract

The Fama and French five-factor model was developed as an expansion of the previous Fama and French three-factor model, where the five-factor model included two additional factors profitability and investment to the existing three factors market, size, and value to better estimate the expected return of the security. As COVID-19 had negatively impacted the economy in the U.S., this study applied the Fama and French five-factor model to examine the performance of the service industry before and after the outbreak of COVID-19 using the dataset from Kenneth R. French Data Library and draw insight about the prospect of the service industry. The estimated coefficients as well as the t-statistics of the five factors for before and after the outburst of COVID-19 periods were computed and analyzed. The result showed that all five factors market, size, value, profitability, and investment were statistically significant during the COVID-19 period, with changes in some of the factors after the hit of the pandemic, revealing the return of service industry is associated with the five factors. Specificially, investors during this crisis and in the future should be more cautious toward service businesses that have smaller-cap, weak profitability and less investment activities.