Abstract
We implement the Fama-French five-factor model and enhance it with a momentum factor for the German market using recent monthly data from 2002 to 2019. We construct the factors associated with the market, size, value, profitability, investment, and momentum for the CDAX constituents and examine to what extent this six-factor model captures the return premia in the German market. Our preliminary analysis does not document any significant evidence on the profitability or investment premium.The results on the six-factor model compared with the three-factor model reveal that the additional factors do not add significant explanatory power to the analysis. We conclude that the relevance of the profitability and investment factors within the context of international asset pricing studies cannot be transferred to the country- specific case of the German market.
Highlights
Fama and French (2015) introduced a five-factor asset pricing model that augments their three-factor model (Fama and French, 1993) by adding the profitability and investment factors. Fama and French (2015) have focused on the U.S market, while Fama and French (2017) extend the analysis to a global reach, cover- KSchmalenbach Bus Rev (2020) 72:661–684 ing North America, Europe, and Asia Pacific
Among previous country-specific studies are those by Daniel et al (2001), who examine asset pricing anomalies in the Japanese stock market, and L’Her et al (2004), who apply the Carhart (1997) four-factor model to the Canadian stock market
The Fama-French five-factor model has been tested on the Japanese market by Kubota and Takehara (2018) and on Australian data by Chiah et al (2016)
Summary
Fama and French (2015) introduced a five-factor asset pricing model that augments their three-factor model (Fama and French, 1993) by adding the profitability and investment factors. Fama and French (2015) have focused on the U.S market, while Fama and French (2017) extend the analysis to a global reach, cover-. The German market has been previously studied by Ziegler et al (2007), who apply the Fama-French three-factor model to the German equity market and cover a time period from 1968 to 1995 They conclude that the explanatory power of the three-factor model in Germany is not as high as in the U.S, it constitutes an improvement compared with a one-factor model. The smaller amount of available entities compared with the U.S market leads to the adjustment of calculating 16 (4x4) value-weighted portfolios rather than 25 (5x5), as in Fama and French (2015) This corresponds to the previous studies of the German equity market by Artmann et al (2012) and Hanauer et al (2011). The risk-free rate is based on the one month EURIBOR rates
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