Fama-French Model Research Articles

Application of Fama-French 5-factor model on investigating the influence of Covid-19 on meal industry in U.S. stock market

At the end of 2019, New Coronavirus first swept China and spread to the whole world, which affected almost all industries globally. Therefore, both the economy and the stock market in this world received a punch. This essay uses the Fama-French model to calculate the rate of return of a given asset in the meal industry. The periods chosen for this research are September 2019 to February 2020 and March 2020 to August 2020, which are before and during the Covid-19. Due to the impact of the Covid, to control the flow of people and prevent cross-infection, many public places were forced to close, so were restaurants. Therefore, the industry selected in this paper is the meal industry. In conclusion, because of the volatility of the US stock market, the shares of the beverage industry have also been seriously affected. Due to the epidemic's impact, large enterprises tend to overestimate themselves, but investors have fewer expectations of them. Therefore, although the risk of small enterprises in the catering industry is greater, the income of small enterprises is greater than that of large enterprises, and the small-scale effect is enhanced. Therefore, investors are more inclined to invest in small enterprises. In addition, Fama-French five-factor model also shows that investors are more inclined to choose companies with aggressive investment styles.

Net Impact of COVID-19 on REIT Returns

Using an extended Fama–French model for REIT returns, we examine how the net impact of the COVID-19 pandemic differs from that of recessions. We find that, as anticipated, recessions have a negative net impact on office and residential REIT returns but that the COVID-19 pandemic has a positive net influence on industrial REIT returns because of e-commerce and the demand for storage, distribution, and shipping. Contrary to what we anticipated, there are no negative net effects of the COVID-19 pandemic on office and residential REIT returns, perhaps caused by both existing office and residential leases, the percentage rent clause for commercial properties, and the grace period for residential properties during the COVID-19 pandemic. In contrast to moving solely during recessions and the COVID-19 pandemic, we find that retail REIT returns fluctuate along with ongoing macro/asset-pricing conditions throughout the boom and bust cycle.

Analysis of Games Industry during COVID-19 Based on Fama-French Five-factor Model

Since the 1960s, asset pricing model has become the core research field of modern finance. It has been widely used in financial market, consumption and investment decision-making, monetary policy and even macroeconomic estimation and prediction. Scholars have done a lot of research on the theory and application of CAPM model, and achieved dramatic results. With the improvement of the stock market, CAPM model has gradually lost its convincing explanatory power when describing the relationship between stock return rate and risk. In 1992, Fama and French proposed a three-factor model to enhance the explanatory power of CAPM, and proposed that factors such as the total market value of a company and the book-to-market ratio could better explain the difference of stock returns on the cross section. In 2013, Fama and French improved the original three-factor model by adding profitability factor and investment mode factor to the three-factor model, and proposed a five-factor model, so as to better explain the difference in cross-sectional returns of stocks. COVID-19 caused a big black swan event and the impact is very dramatic that the economy has a huge impact. Therefore, this paper takes the game and entertainment industry as an example. Based on the Fama-french five-factor model and multiple linear regression, the changes of factor coefficients before and after the epidemic are analyzed, and some investment suggestions are given for reference. It is found that because of the emergence and outbreak of COVID-19 the game industry is more sensitive to the fluctuations of the market economy, and small businesses with a high book-to-market ratio are worth investing in.

The importance of distinguishing between precious and industrial metals when investing in mining stocks

We investigate the sensitivity of world mining stocks to precious and industrial metals by adding a metal factor to the CAPM and Fama-French models. We find that metals are fundamental in explaining mining stocks' returns and more influential than Fama-French factors. We also find that metals are more significant for stocks of precious than industrial metals and the effect is stronger for firms domiciled in developed markets. The market factor is more relevant for stocks of industrial metals. Our results suggest that investors should treat mining stocks differently and need to distinguish between precious and industrial metals.

ЦЕНООБРАЗОВАНИЕ НА ФОНДОВОМ РЫНКЕ: МОДЕЛЬ ДОХОДНОСТИ КАПИТАЛЬНЫХ АКТИВОВ (CAPM) И МОДЕЛЬ ФАМЫ-ФРЕНЧА

. Subject / topic: This article examines the issues of pricing in the stock market in order to help institutional investors to preserve their own capital and increase it based on the study of capital asset return models (CAPM) and Fama-French model. The tasks of collecting the necessary statistical data, analyzing them, as well as applying the model to assess various assets and analyzing the accuracy of their application have been solved. The use of this model makes it possible to reliably predict the prices of assets on the stock market, however, it does not guarantee 100% accuracy, and therefore, its use still entails the risks of capital loss. Goals / objectives: The aim of the study is to compare the accuracy of the studied models, as well as to identify their advantages and disadvantages. Methodology: The methodological basis of the study is made up of both general and particular scientific methods of cognition. Used such methods as induction and deduction, methods of comparison and generalization. Results / conclusions: The authors found that the use of the five-factor Fama-French model makes it possible to fairly reliably predict asset prices in the stock market, but does not guarantee 100% accuracy, so its use still entails the risk of capital loss.

The inefficiency of information transmission between stock index futures and the underlying index: Measurements and characteristics

The inefficiency of information transmission (IEIT) between stock index futures and the underlying index is dynamic and difficult to measure due to severe market frictions. This paper develops a new nonparametric measure based on the dynamic time warping algorithm to gauge IEIT and empirically calculates it using high-frequency data on CSI 300 index futures and the CSI 300 index. The major findings are that (i) IEIT exhibits an intraday U-shaped pattern; (ii) not only can IEIT explain the anomalies of the Fama–French model but also has pricing power; (iii) IEIT is significantly affected by their liquidity and volatility, synchronization of their trading hours and the overnight information shocks to the stock index; and (iv) a lower IEIT can result in stronger price discovery leadership and reduced speculation in the futures market.

Reputation-Based Disclosure and Cost of Capital: The Role of Controlling Ownership

This study aims at examining the effect of reputation-based disclosure on the cost of capital and the role of the controlling ownership as a moderating variable. The sample of the study consists of manufacturing firms listed on the Indonesia Stock Exchange (IDX) for the years 2009–2013. This study uses price-earnings to growth (PEG) as a proxy of the cost of capital. The result demonstrates that reputation-based voluntary disclosure has a negative effect on the cost of capital. The controlling ownership further strengthened this effect. The cost of capital is reduced by higher disclosure. However, the interaction between reputation-based disclosure and ownership structure has a positive effect on the cost of capital. The result of this study is robust, using other measurements of the cost of capital (Fama-French model). It implies that investors can utilize firms’ disclosure as a signal to estimate returns. Firms, however, strive to impress investors positively to reduce the expected returns.

The Performance of ESG Funds vis-à-vis Non-ESG Funds

This article studies the returns of 80 European and 64 US funds and attempts to identify whether those funds that invest in companies following environmental, social, and governance (ESG) principles differ from conventional funds in terms of performance. The alpha, Sharpe ratio, Treynor ratio, and excess daily returns are used as various measures of performance. The five-factor Fama-French model is also applied to distinguish possible different influences of explanatory variables on ESG and non-ESG funds. This article follows the matched pair approach for fund evaluation (developed by Mallin, Saadouni, and Briston 1995) on 4 years of data (2017–2021). The empirical findings do not reveal any statistically significant difference between ESG and non-ESG funds although the former have slightly higher returns than the latter. The article adds to the early evidence of Statman (2000); Renneboog, ter Horst, and Zhang (2008a); and others on investing according to ESG criteria while acknowledging that the benefits are likely to be associated with investor’s demands and awareness of the environment, society, and corporate governance issues.

The Fama-French multifactor model with market and Pandemic news fear sentiments: a test in the Mexican stock markets

In the present paper, we test the extension of the Fama-French (FF) three-factor model by including Economic, stock market, and Pandemic news uncertainty. For this purpose, we used either Global news or social media (Twitter) sentiment indexes, along with Mexican and U.S. implied volatility (VIX) ones. Using robust panel data regression models in the 72 most traded and biggest companies in the Mexican stock markets from 2017 to 2021, we found that only the Mexican VIX index is helpful to extend the FF model. Contrary to our expectations, the social media and news sentiment indexes have a negligible impact on stock price formation. These results suggest that developing more appropriate sentiment indexes is an essential need in the Mexican stock markets.

Mathematical Modeling of the Financial Impact of Air Crashes on Airlines and Involved Manufacturers

Despite air transport being the safest way to travel, accidents still happen, which incur massive costs and many consequences for industry and society. The main objective of this research is to determine the financial impact of air crashes by distinguishing between fatal and non-fatal events and their effect on the market stock price of the involved companies of airlines and manufacturers. This study also aims to contribute to the literature about the Event Study Methodology by determining which model of the two most employed in this methodology (Market model or Fama-French model) provides more accurate results. The results reveal that the companies harmed when an air crash occurs include the involved airline, regardless of the causes of the crash if it was a fatal event. However, with non-fatal events, the impact on airlines differs depending on the event’s outcome. In any case, effects are immediate, especially on the same day the event occurred. Nevertheless, manufacturing firms show no negative abnormal returns after an air crash. Finally, the Market model is more accurate in this study. These results are important for investors since they show mistrust in air transport and losses only occur in the airline involved, especially if the accident is fatal. In turn, our results provide reassurance to investors in manufacturing companies in the event of such an occurrence. In any case, this study has shown that both airlines and manufacturers must continue to promote and improve safety.

Validation of Asset Pricing Models with respect to Indian Capital Markets as a Developing Economy

The following research study focuses on the Indian capital market as a wider scope of developing economies. We understand the functioning of capital markets in general as well as the structure of the same in the Indian economy. We will look into differences between developing and developed economies. The paper makes a deeper analysis of whether the Capital Asset Pricing Model stands true for the Indian Capital Market over a duration of 10 years’ data. Similarly a hypothetical portfolio was created to assess the validity of the Fama- French model. We also give an analysis of how the market capitalisation to GDP ratio could give any kind of insight to whether the CAPM model gets replicated in that country’s capital market. The paper concludes with a real view analysis beyond the theory of the asset pricing models and verdict on a model which gives better results in the case of a developing economysuch as India. Key words: Asset Pricing Model, CAPM, Fama-French model, Buffett Indicator, Developing economies, Developed economies.

The impact of the stage of the company's life cycle on the cost of equity through the coefficient β

The valuation of the company's equity is one of the main tasks in the framework of the valuation of the company, as well as one of the main sections of corporate finance. The most used method of assessing the return on equity is the CAPM model, but this article analyzes the four-factor Fama-French model- Karcher due to its novelty and, as a consequence, fewer studies. The author analyzes the impact of the company's life cycle on the return on equity using an econometric analysis of 5 clusters of 3,113 public American companies (data for 1989-2019) classified according to the criterion of the stage of the life cycle. The relevance of the study lies in the absence of an unambiguous answer, confirming or refuting the existence of a link between the cost of equity and the stage of the life cycle. The classification is based on an article by Victoria Dickinson, Professor at the University of Mississippi, "Cash flows as an indicator of the stage of the company's life cycle." According to the results, the stage of the life cycle affects the cost of own capital, β the coefficient decreases during the first three stages (formation, growth, maturity), then continues to grow (shake-up, recession). The minimum value falls on the maturity stage, it can be assumed that this stage of the life cycle is the most reliable for stakeholders. This article can be useful to all persons evaluating business (investors, appraisers, etc.), as well as for the further development of this theoretical aspect.

THE ROLE OF INVESTOR SENTIMENT ON PRICING EFFECT OF PROFITABILITY RISK FACTOR IN KENYA

Emerging stock markets are characterized by strong investor sentiment and rapid fluctuations in returns. However, the role of investor sentiment on asset pricing has not been explored in these markets. This study sought to establish if the effect of the profitability risk factor on stock returns would vary with the level of investor sentiment at the Kenyan equity market. A quantitative causal time-series design was adopted to analyze the cause-effect relationship among the study variables. The study utilized monthly equity return data on 60 firms listed at the Nairobi Securities Exchange (NSE) from 2011 to 2019. Test portfolios were constructed following the Fama-French five-factor model framework. Auto-Regressive Distributed Lag (ARDL) and Vector Error Correction (VEC) estimation techniques show that profitability risk factor is a significant predictor of stock returns at a 5% level. Overall, though not consistent with valuation theory, the coefficient on profitability risk factor is negative, implying a high exposure to profitability risk results in low returns. Further, adding sentiment variables to the main effects model would enhance the significance of the profitability risk factor at the NSE. The evidence presented contributes to establishing investment strategies, estimating the required rate of return and assessing portfolio performance of collective investments.

Empirical testing of the five-factor Fama-French model on the Russian stock market

Empirical testing of the five-factor Fama-French model on the Russian stock market

Cannabis Stocks Returns: The Role of Liquidity and Investors’ Attention via Google Metrics

This paper studies one of the most popular investment themes over recent years, investing in the cannabis industry. In particular, it investigates relationships between investor attention, as proxied by Google Trends, and stock market activities, i.e., return, volatility, and liquidity. To this end, in the empirical analysis we study how liquidity and investors’ attention affect the return dynamics of an investment in cannabis stocks by augmenting the three-factor Fama–French model. In addition, we use a vector autoregressive approach and the impulse response function to measure shock transmission between the variables under consideration. Our empirical findings show that there is a statistically positive relationship between cannabis stock returns and liquidity. We also find that increased investors’ attention results in higher returns.

The Fama-French model for estimating the cost of equity capital: The impact of real options of investment projects

We use the classic and modified Fama-French models to estimate the cost of capital of stock portfolios listed on selected markets. We compare four highly developed markets (US, EU, Japanese and global) and the Polish market as an alternative investment opportunity and a CEE emerging market. The performance of the applied procedures for estimating the cost of capital for company projects is examined and cost of capital is assessed with and without real option adjustment. We adjust the portfolios’ returns using the firms’ book-to-market ratios and idiosyncratic volatility as option proxies. The variability of cost of capital is evaluated using bootstrap methods. Our study shows a clear difference between bootstrapped distributions of cost of capital for the tested developed market and the Polish market portfolios. Wider confidence intervals of the estimated cost of capital of the studied Polish portfolios may result from political motivations in managing state-controlled companies. Our findings also indicate a clear difference between the cost of capital for tested portfolios with and without option adjustment. The widths of the estimated confidence intervals increase after option adjustment. The highest/lowest values of the cost of capital both with and without option adjustment are found for the US/Japanese market portfolios.

The performance of retail investors, trading intensity and time in the market: evidence from an emerging stock market

We analyze all stock transactions executed by the universe of individual (or retail) investors of the Colombian Stock Exchange (5,380,810 trades performed by 42,211 individual investors between 2006 and 2016). Retail investors had negative abnormal returns on a gross excess return basis that ranged between 4% and 4.4% per year (depending on whether the alpha was estimated using the CAPM, Fama-French model or Carhart model). When transaction costs are considered, the underperformance of retail investors becomes even more pronounced, and the most active traders perform worse than less active traders even on a gross excess return basis. The underperformance of retail investors can be explained by their bad timing but only prior to the bankruptcy of Interbolsa, the largest stock brokerage house in Colombia at the time (2012). Once we control for the number of trades and other variables, we find that retail investors present in the market for a longer period of time and trading more actively outperform the other investors (on both a gross and net basis).

Analysis of the Fama-French Model (FF5) Factor on the Food Industry under the COVID-19 Epidemic

Due to the impact of the COVID-19 epidemic, the global economy has been affected to some extent in all aspects, with the food industry bearing the brunt. However, the specific research on the stock market segmentation industry is relatively lacking. This article aims to analyze the food industry's current status and development prospects by discussing the Fama-French three-factor model and five-factor model before and after the epidemic in the food industry and put forward constructive opinions on this. The analysis will use the method of coefficient comparison and effectiveness comparison to analyze the food industry's coefficients before and after the epidemic in the same model and model differences and combine the background of the industry to get the reasons for these differences.

Pricing of Liquidity Risk: New Evidence from the Latin American Emerging Stock Markets

ABSTRACT This paper aims to analyze whether the liquidity risk is priced in Latin-American emerging stock markets. For that, we test the performance of the liquidity augmented version of Fama-French three and five factor models and Carhart four factor model since there is not yet a consensus about their suitability for these markets. Two versions of a liquidity factor were constructed based on two proxies that consider different dimensions of liquidity and are more appropriate for low frequency data. The GRS statistics showed Latin American average returns are better explained by the liquidity augmented Fama-French five-factor model. When estimated by GMM-IVd, due to the possible endogenous problems caused by liquidity, the results of the models did not significantly change. The results were robust to the January Effect. Furthermore, when the sample period was divided into two subperiods, both were statistically significant, although the explanatory power was greater in the second subperiod.

Is it attractive to invest in alternative energy? Evidence from a five-factor Fama-French model for regional DJSI and renewable stock indexes

PurposeThis study aims to examine the attractiveness of the regional Dow Jones Sustainability Indexes (DJSI) and several renewable energy indexes during December 31, 2010 to December 31, 2019. This study uses a risk-return analysis and a set of explanatory factors. Lastly, this study conducts a comparative analysis of these indexes with conventional indexes.Design/methodology/approachThis study uses data from Eikon, a Thomson Reuters database. To analyze the indexes’ behavior, this study uses the indexes’ annual return as of December 31 for each year. Next, this study estimates the Fama and French’s five-factor model using an ordinary least squares regression for regional DJSI and renewable energy indexes.FindingsThe results show that regional DJSIs delivered returns both above and below conventional indexes. In contrast, renewable energy indexes had high betas and negative returns, making them unattractive to investors.Practical implicationsThe results imply the need for public financing programs that support the transition to a sustainable economy and reduce risk and increase the return on private investment.Social implicationsThis study provides insights for policymakers regarding the importance of sustainability indexes in the transition to a green economy.Originality/valueThis study contributes to the growing literature on Fama and French’s five-factor model of sustainability indexes, especially in the current context characterized by intense green political changes. In particular, this study complements the few studies that have addressed the economic implications of renewable energy indexes in markets.