Comparative Empirical Evidence of a Three-factor Model and a Five-factor Model Based on Anomalous Studies

Abstract

The Fama-French three-factor model explains the magnitude of stock market returns by constructing three variable factors. The five-factor model adds two more factors to the three-factor model to provide a more accurate explanation of stock re-turns. These two factors have been widely used in the industry for decades since their inception. As China's securities industry has developed late, research on the stock industry has been more oriented towards empirical studies of the three-factor and five-factor models, and less research has been conducted on many financial anomalies that cannot be explained by traditional financial theory. This paper systematically describes the origins of factor anomaly research and five-factor anomaly research on the A-share market from 1997 to 2020, constructs new factors, compares and summarizes them with the old ones, and concludes that the three-factor anomaly model and five-factor anomaly model are not yet able to adequately explain A-share stocks and have larger errors when conducting empirical evidence; in contrast, the CPAM anomaly model can better conduct anomaly research, and the resulting In contrast, the CPAM is more suitable for the empirical study of anomalies and can pro-vide investors with more effective investment strategies and recommendations.