Testing Alternative Versions of the Fama-French Five-Factor Model in the UK

Abstract

This paper evaluates whether the new Fama-French five-factor model is able to offer a better description of UK equity returns than the three-factor model. The paper extends previous studies by testing alternative specifications of the profitability factor. The initial tests indicate that a respecified five-factor model using gross profit, rather than operating profit, provides a better description of UK equity returns. However, the models tested perform inconsistently when evaluated against different test portfolios and neither the value nor investment factors are consistently priced. As well as highlighting the importance of testing factor models using an array of different test portfolios, the results show that both the three- and five-factor models are unable to offer a convincing asset pricing model for the UK.