Comparison Between Different Pricing Models: Evidence from the Technology Industry

Abstract

The primary goal of this study is to investigate the applicability and analytical effectiveness of three models, namely the Capital Asset Pricing Model (CAPM), the Fama-French Three-Factor Model, and the Fama-French Five-Factor Model, within the technology industry. The study focuses on a sample of six representative technology companies, employing monthly data spanning a period of five years from 2018 to 2023. Empirical tests and regression analyses are conducted to empirically assess the performance of these three models. The results demonstrate that the Fama-French Three-Factor Model exhibits superior fitting performance compared to the CAPM model, as initially hypothesized. However, when comparing the fitting performance of the Fama-French Five-Factor Model to the Fama-French Three-Factor Model, the study reveals that the former does not exhibit a significant improvement and even shows a slight decrease in fitting effectiveness. For the technology industry, the Three-Factor Model effectively captures systematic risk and accounts for a sizable proportion of the variation in regressions. Additional factors in the Five-Factor Model might introduce additional complexity without significantly enhancing the model's explaining extent. Overall, this study underscores the importance of model selection and raises awareness about the trade-off between model complexity and explanatory capability, particularly in the technology industry.