Reasonable Conjecture and Demonstration of Fama-French Model and Its Applications in Australia and US

Abstract

Fama-French three-factors model and Fama-French five-factors model have been considered as significant models for calculating stock returns and estimating potential risk events. However, as Fama and French did in 2015, one reasonable conjecture has been come up with: Is there any extra factors could be added into the Fama-French five factors model? This paper raises a reasonable conjecture about the number of factors in Fama-French model and use the method of data analysis process with R software. Then this paper prove that the Fama-French five-factors model is still the most reliable to estimate the returns of portfolios currently based on the statistical data summaries. Besides, this paper also talks about the application and applicability of Fama-French models in Australia and US with some real cases and data analysis process. The result of this study shows that the applicability of Fama-French models is confirmed in both Australia and US. So the investors in Australia and US could use Fama-French models to estimate their expected return for some specific candidate projects and choose the best one to make investment based on the analysis results.