The empirical test of Asset Pricing Models in US Machinery market: Comparison of CAPM, FF3 and FF5 Models

Abstract

As a sample, this study looks at data relating to the machinery sector of the US stock market from July 1926 to July 2022. This study's overarching objective is to investigate how three different financial models—the CAPM, the Fama-French 3 Factor Model, and the Fama-French 5 Factor Model, which have been implemented in the machinery sector over the course of time. This will allow the researchers to determine whether or not these models are applicable to the US stock market. In general, the three-factor model has better explanatory power for excess returns than the five-factor model, even with the addition of the investment and profitability factors for a single sector in the United States, the machinery sector and it explains almost all of the excess returns. This maybe because the three-factor model takes into account fewer variables than the multifactor model. Furthermore, the new profitability and investment factors do not have a single-factor effect that is as strong as that of the size and valuation factors.