Is Fama-French five factor model better than the three factor model——Empirical evidence from the US stock market

Kaiming Yan

doi:10.54691/bcpbm.v35i.3403

Authors

Kaiming Yan

DOI:

https://doi.org/10.54691/bcpbm.v35i.3403

Keywords:

Three factor model; five factor model; stock return.

Abstract

This paper takes the listed companies in the US stock market from July 1993 to October 2021 as a sample to compare the predictive ability of the three-factor model and the five-factor model. The main conclusions are as follows: Firstly, the correlation between the factors of the three factor model and the five factor model is not significant. Second, using the three factor model to test the profitability effect and investment style effect, it is found that there are still significant profitability effect and investment style effect in the US stock market after 1993 after the adjustment of the three factor model. To some extent, this shows that the five factor model is better than the three factor model in predicting the US stock market returns after 1993.Third, through the redundancy test of the factors in the five factor model, it is found that after the adjustment of several other risk factors, the US stock market still has significant market risk, scale effect, profitability effect and investment style effect, but the HML factor is a redundant factor for explaining the stock portfolio yield. Fourth, by comparing the effectiveness of HML, RMW and CMA factors, it is found that the coefficients of CMA factors are not significant, indicating that CMA factors cannot explain the portfolio return rate of the US stock market.

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