scholarly journals Is the Fama and French five-factor model robust in the Chinese stock market?

2019 ◽  
Vol 24 (3) ◽  
pp. 278-289 ◽  
Author(s):  
Tzu-Lun Huang
Keyword(s):  
Stock Market ◽  
Factor Model ◽  
Five Factor Model ◽  
Chinese Stock Market ◽  
Fama And French

Who is King in Factor Zoo? Case of the Chinese Stock Market

2020 ◽  
Vol 14 (2) ◽  
pp. 77-102
Author(s):  
Simon M. S. So
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Investment Strategy ◽  
Capital Asset Pricing ◽  
Chinese Stock Market ◽  
Fama And French ◽  
Three Factor

This paper aimed to evaluate and compare individual performances and contributions of seven well-known factors, selected from four widely cited asset pricing models: (1) the capital asset pricing model of Sharpe (1964), (2) the three-factor model of Fama and French (1993) the augmented four-factor model of Carhart (1997), (3) the five-factor model of Fama and French (2015), and (4) the illiquidity model of Amihud, et al. (2015) in capturing the time-series variation of stock returns and absorbing the 12 prominent anomalies. The anomalies were constructed by forming long-short portfolios, and regressions were run to examine their monthly returns from 2000 to 2019. We found that there is no definite and absolute “king” in the factor zoo in the Chinese stock market, and size is the relative “king” that can absorb the maximum number of anomalies. Evidence also indicates that the three-factor model of Fama and French may still play an important role in pricing assets in the Chinese stock market. The results can provide investors with a reliable risk factor and help investors form an effective investment strategy. This paper contributes to asset pricing literature in the Chinese market.G1

scholarly journals A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market

2019 ◽  
Vol 12 (1) ◽  
pp. 52 ◽  
Author(s):  
Nada S. Ragab ◽  
Rabab K. Abdou ◽  
Ahmed M. Sakr
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Five Factor Model ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Time Period ◽  
Model Evidence ◽  
Fama And French ◽  
Three Factor

The focus of this paper is to test whether the Fama and French three-factor and five factor models can capture the variations of returns in the Egyptian stock market as one of the growing emerging markets over the time-period July 2005 to June 2016. To achieve this aim, following Fama and French (2015), the authors construct the Fama and French factors and three sets of test portfolios which are: 10 portfolios double-sorted on size and the BE/ME ratio, 10 portfolios double-sorted on size and operating profitability, and 10 portfolios double-sorted on size and investment for the Egyptian stock market. Using time-series regressions and the GRS test, the results show that although both models cannot be rejected as valid asset pricing models when applied to portfolios double-sorted on size and the BE/ME ratio, they still leave substantial variations in returns unexplained given their low adjusted R2 values. Similarly, when the two models are applied to portfolios double-sorted on size and investment, the results of the GRS test show that both models cannot be rejected. However, when the two models are applied to portfolios double-sorted on size and operating profitability, the results of the GRS test show that both models are strongly rejected which imply that both models leave substantial variations in returns related to size and profitability unexplained. Specifically, the biggest challenge to the two models is the big portfolio with weak profitability which generate a significantly negative intercept implying that the models overestimate its return.

scholarly journals Applicability of Investment and Profitability Effects in Asset Pricing Models

2017 ◽  
Vol 21 (6) ◽  
pp. 851-874 ◽  
Author(s):  
Márcio André Veras Machado ◽  
Robert Faff ◽  
Suelle Cariele de Souza e Silva
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Poor Performance ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
The Poor ◽  
Fama And French

Abstract This study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French's (2015) five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson's (2007) five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015).

New Evidence to Assess the Asset Pricing Model: An Empirical Investigation Based on Bayesian Network

2020 ◽  
Vol 23 (03) ◽  
pp. 2050021
Author(s):  
Fatma Hachicha ◽  
Sahar Charfi ◽  
Ahmed Hachicha
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Bayesian Network ◽  
Factor Model ◽  
Five Factor Model ◽  
Pricing Model ◽  
Stock Market Returns ◽  
Asset Pricing Model ◽  
Fama And French ◽  
Better Than

An extensive, in-depth study of risk factors seems to be of crucial importance in the research of the financial market in order to prevent (or reduce) the chance of developing this return. It represents market anomalies. This study confirms that the [Formula: see text]-factors model is better than the other traditional asset pricing models in explaining individual stock return in the US over the 2000–2017 period. The main focus of data analysis is, on the use of models, to discover and understand the relationships between different factors of risk market anomaly. Recently, Fama and French presented a five-factor model that captures the size, value, profitability, and investment patterns in average stock market returns better than their three-factor model presented previously in 1993. This paper explores a shred of new empirical evidence to assess the asset pricing model through an extension of Fama and French model and a report on applying Bayesian Network (BN) modeling to discover the relationships across different risk factor. Furthermore, the induced BN was used to make inference taking into account sensibility and the application of BN tools has led to the discovery of several direct and indirect relationships between different parameters. For this reason, we introduce additional factors that are related to behavioral finance such as investor’s sentiment to describe a behavior return, confidence index, and herding. It is worth noting that there is an interaction between these various factors, which implies that it is interesting to incorporate them into the model to give more effectiveness to the performance of the stock market return. Moreover, the implemented BN was used to make inferences, i.e., to predict new scenarios when different information was introduced.

scholarly journals Examination and Modification of Multi-Factor Model in Explaining Stock Excess Return with Hybrid Approach in Empirical Study of Chinese Stock Market

2019 ◽  
Vol 12 (2) ◽  
pp. 91
Author(s):  
Jian Huang ◽  
Huazhang Liu
Keyword(s):  
Risk Factors ◽  
Stock Market ◽  
Empirical Study ◽  
Risk Premium ◽  
Stock Price ◽  
Factor Model ◽  
Five Factor Model ◽  
Hybrid Approach ◽  
Chinese Stock Market ◽  
Cyclical Pattern

To search significant variables which can illustrate the abnormal return of stock price, this research is generally based on the Fama-French five-factor model to develop a multi-factor model. We evaluated the existing factors in the empirical study of Chinese stock market and examined for new factors to extend the model by OLS and ridge regression model. With data from 2007 to 2018, the regression analysis was conducted on 1097 stocks separately in the market with computer simulation based on Python. Moreover, we conducted research on factor cyclical pattern via chi-square test and developed a corresponding trading strategy with trend analysis. For the results, we found that except market risk premium, each industry corresponds differently to the rest of six risk factors. The factor cyclical pattern can be used to predict the direction of seven risk factors and a simple moving average approach based on the relationships between risk factors and each industry was conducted in back-test which suggested that SMB (size premium), CMA (investment growth premium), CRMHL (momentum premium), and AMLH (asset turnover premium) can gain positive return.

scholarly journals Is the Long Memory Factor Important for Extending the Fama and French Five-Factor Model: Evidence from China

2021 ◽  
Vol 2021 ◽  
pp. 1-7
Author(s):  
Yicun Li ◽  
Yuanyang Teng ◽  
Wei Shi ◽  
Lin Sun
Keyword(s):  
Long Memory ◽  
Hurst Exponent ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Size Factor ◽  
Chinese Stock Market ◽  
Memory Factor ◽  
Weak Factor ◽  
Fama And French

This paper proposes a new factor model, which is built upon the marriage of the Fama and French five-factor model and a long memory factor based on the monthly data of the A-share market in the Chinese stock market from January 2010 to July 2020. We first examine the explanatory power of the Fama and French five-factor model. We find strong market factor return of market (RM), size factor small minus big (SMB), and value factor high minus low (HML) but weak factor robust minus weak (RMW) and investment factor conservative minus aggressive (CMA). Then, both the Hurst exponent and the momentum factors (MOM) are added to the model to test the improvement of the explanatory power of these two new factors. We find that both the momentum factor and the Hurst exponent factor can effectively improve the explanatory power of the model. The momentum factor captures the short-term trend, but it cannot completely replace the Hurst exponent, which reflects the long memory effect.

scholarly journals Analysis of the Spanish IBEX-35 Companies’ Returns Using Extensions of the Fama and French Factor Models

Symmetry ◽  
2020 ◽  
Vol 12 (2) ◽  
pp. 295 ◽  
Author(s):  
Francisco Jareño ◽  
María de la O González ◽  
Laura Munera
Keyword(s):  
Interest Rates ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Factor Models ◽  
Final Conclusion ◽  
Economic Cycle ◽  
Explanatory Factors ◽  
Nominal Interest Rates ◽  
Fama And French

This paper studies in depth the sensitivity of Spanish companies’ returns to changes in several risk factors between January 2000 and December 2018 using the quantile regression approach. Concretely, this research applies extensions of the Fama and French three- and five-factor models (1993 and 2015), according to González and Jareño (2019), adding relevant explanatory factors, such as nominal interest rates, the Carhart (1997) risk factor for momentum and for momentum reversal and the Pastor and Stambaugh (2003) traded liquidity factor. Additionally, for robustness, this paper splits the entire sample period into three sub-sample periods (pre-crisis, crisis and post-crisis) to analyse the results according to the economic cycle. The main conclusions of this paper are fourfold: First, these two models have the greatest explanatory power in the extreme quantiles of the return distribution (0.1 and 0.9) and more specifically in the lowest quantile 0.1. Second, the second model, based on the Fama and French five-factor model, shows the highest explanatory power not only in the full period but also in the three sub-periods. Third, the bank BBVA is the company that shows the highest sensitivity to changes in the explanatory factors in most periods because its adjusted R2 is the highest. Fourth, the stage of the economy with the highest explanatory power is the crisis subperiod. Thus, the final conclusion of this paper is that the second model explains best variations in Spanish companies’ returns in crisis stages and low quantiles.

scholarly journals Interest rate sensitivity of spanish companies. An extension of the Fama-French five-factor model

2018 ◽  
Vol 68 (4) ◽  
pp. 617-638 ◽  
Author(s):  
Francisco Jareño ◽  
María de la O González ◽  
Marta Tolentino ◽  
Sara Rodríguez
Keyword(s):  
Interest Rates ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Rate Sensitivity ◽  
Share Prices ◽  
Explanatory Variables ◽  
Fama And French ◽  
Recent Financial Crisis

This paper studies the sensitivity of share prices of Spanish companies included in the IBEX-35 to changes in different explanatory variables, such as market returns, interest rates and factors proposed by Fama and French (1993, 2015) between 2000 and 2016. In addition, for robustness, this paper analyses whether the sensitivity of stock returns is different between two periods: precrisis and recent financial crisis. The results confirm that, in general, all the considered factors are relevant. Furthermore, “market return” and “size” factors show greater explanatory power, together with the “value” factor in the crisis period. Regarding the analysis at sector level, “Oil and Energy”, “Basic Materials, Industry and Construction” and “Financial and Real Estate Services” sectors appear to be highly sensitive to changes in the risk factors included in the asset pricing factor model.

Evaluating alternative performance benchmarks for Indian mutual fund industry

2017 ◽  
Vol 14 (2) ◽  
pp. 222-250 ◽  
Author(s):  
Sanjay Sehgal ◽  
Sonal Babbar
Keyword(s):  
Asset Pricing ◽  
Mutual Fund ◽  
Factor Model ◽  
Five Factor Model ◽  
Content Type ◽  
Asset Pricing Model ◽  
Fund Managers ◽  
Asset Pricing Models ◽  
Performance Benchmarks ◽  
Fama And French

Purpose The purpose of this paper is to perform a relative assessment of performance benchmarks based on alternative asset pricing models to evaluate performance of mutual funds and suggest the best approach in Indian context. Design/methodology/approach Sample of 237 open-ended Indian equity (growth) schemes from April 2003 to March 2013 is used. Both unconditional and conditional versions of eight performance models are employed, namely, Jensen (1968) measure, three-moment asset pricing model, four-moment asset pricing model, Fama and French (1993) three-factor model, Carhart (1997) four-factor model, Elton et al. (1999) five-index model, Fama and French (2015) five-factor model and firm quality five-factor model. Findings Conditional version of Carhart (1997) model is found to be the most appropriate performance benchmark in the Indian context. Success of conditional models over unconditional models highlights that fund managers dynamically manage their portfolios. Practical implications A significant α generated over and above the return estimated using Carhart’s (1997) model reflects true stock-picking skills of fund managers and it is, therefore, worth paying an active management fee. Stock exchanges and credit rating agencies in India should construct indices incorporating size, value and momentum factors to be used for purpose of benchmarking. Originality/value The study adds new evidence as to applicability of established asset pricing models as performance benchmarks in emerging market India. It examines role of higher order moments in explaining mutual fund returns which is an under researched area.

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