Choosing Factors for the Vietnamese Stock Market

Nina Ryan,Xinfeng Ruan,Jing A Zhang,Jin E Zhang

doi:10.3390/jrfm14030096

Abstract

In this paper, we test the applicability of different Fama–French (FF) factor models in Vietnam, we investigate the value factor redundancy and examine the choice of the profitability factor. Our empirical evidence shows that the FF five-factor model has more explanatory power than the FF three-factor model. The value factor remains important after the inclusion of profitability and investment factors. Operating profitability performs better than cash and return-on-equity (ROE) profitability as a proxy for the profitability factor in FF factor modeling. The value factor and operating profitability have the biggest marginal contribution to a maximum squared Sharpe ratio for the five-factor model factors, highlighting the value factor (HML) non-redundancy in describing stock returns in Vietnam.

Highlights

Since they were introduced over the past 50 years, Fama–Macbeth cross-sectional regressions (Fama and Macbeth 1973) have become a standard tool in asset pricing testing that links the average stock returns to its characteristics
There are debates over which factors to use in asset pricing models (Fama and French 2018; Hou et al 2019; Ball et al 2015), especially with regard to the controversy around the choice of a proxy for the profitability factor and the issue of value factor redundancy (Fama and French 2015)
The test statistics show that the new model can account for more asset pricing anomalies than the traditional asset pricing models of capital asset pricing models (CAPM), the three-factor and the four-factor model

Summary

Introduction

Since they were introduced over the past 50 years, Fama–Macbeth cross-sectional regressions (Fama and Macbeth 1973) have become a standard tool in asset pricing testing that links the average stock returns to its characteristics. Fama and French (1993) introduced time-series three-factor models to explain the variation in stock returns. The new five-factor model (Fama and French 2015). Tries to explain the relationship between these new factors (profitability and investment) and stock expected returns. There are debates over which factors to use in asset pricing models (Fama and French 2018; Hou et al 2019; Ball et al 2015), especially with regard to the controversy around the choice of a proxy for the profitability factor and the issue of value factor redundancy (Fama and French 2015).

Objectives

Results

Discussion

Conclusion