Abstract
BackgroundFama and French propose a five-factor model that contains the market factor and factors related to size, book-to-market equity ratio, profitability, and investment, which outperforms the Fama-French Three-Factor Model in their paper in 2014. This study investigates the performance of Fama-French Five-Factor Model and compare with that of Fama-French Three-Factor Model on Chinese A-share stock market.MethodsPortfolios are constructed following Fama and French method. The OLS is applied to running time-series regressions; the t-statistics of regression coefficients are corrected for heteroscedasticity and autocorrelation using the Newey-West estimator with five lags.ResultsThe empirical results show that Fama-French Five-Factor Model explanatory power has differences among different sets of portfolios. In comparison with Fama-French Three-Factor Model, the presence of profitability and investment factors seem not to capture more variations of expected stock returns than the three-factor model except for six value-weighted portfolios formed on size and operating profitability.ConclusionsProfitability and investment factors do not have much additional explanatory power, and Fama-French Five-Factor Model does not have significant improvement in explaining average excess stock returns comparing with the original three-factor model on Chinese A-share stock market, which is inconsistent with the findings on US stock market.
Highlights
Fama and French propose a five-factor model that contains the market factor and factors related to size, book-to-market equity ratio, profitability, and investment, which outperforms the Fama-French Three-Factor Fama-French Five-Factor Model (Model) in their paper in 2014
Profitability and investment factors do not have much additional explanatory power, and Fama-French Five-Factor Model does not have significant improvement in explaining average excess stock returns comparing with the original three-factor model on Chinese A-share stock market, which is inconsistent with the findings on US stock market
Empirical results on Chinese A-share stock market The empirical results of FF5F Model on Chinese A-share stock market during the period July 2010 to May 2015 are reported ; we provide the empirical results of FF3F Model over the same time interval for comparison
Summary
Fama and French propose a five-factor model that contains the market factor and factors related to size, book-to-market equity ratio, profitability, and investment, which outperforms the Fama-French Three-Factor Model in their paper in 2014. Fama and French (1993) propose a three-factor model including a size factor (SMB) and book-to-market equity factor (HML) in addition to market beta, which captures the cross-sectional variation in average stock returns. According to Fama and French (FF hereafter), firm size and book-to-market equity ratio are related to the systematic pattern of. Jiao and Lilti China Finance and Economic Review (2017) 5:7 profitability and growth They are potentially major sources of risk in return. These two mentioned variables are known in most studies as two specific market indicators that raise questions about the model. These findings diminished the credence of this model, and a new wave was formed in the development field of financial theories with the aim of explaining the causes of these special consequences
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
