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Choosing factors: Australian evidence

Author

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  • Chai, Daniel
  • Chiah, Mardy
  • Zhong, Angel

Abstract

Using a factor-pricing approach, this paper investigates the extent to which the factors in the Fama–French five-factor model, including momentum, explain Australian equity returns. A comparison of the United States and Australia suggests common components in asset returns. All the factors examined are useful in pricing Australian equities, whereas the HML factor is redundant for the United States. The findings suggest that the Fama–French five-factor model should be at least considered as a benchmark model in asset pricing research.

Suggested Citation

  • Chai, Daniel & Chiah, Mardy & Zhong, Angel, 2019. "Choosing factors: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:pacfin:v:58:y:2019:i:c:s0927538x19303476
    DOI: 10.1016/j.pacfin.2019.101223
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    References listed on IDEAS

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    1. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    2. John M. Griffin, 2002. "Are the Fama and French Factors Global or Country Specific?," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 783-803.
    3. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    4. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    5. Daniel Chai & Robert Faff & Philip Gharghori, 2013. "Liquidity in asset pricing: New Australian evidence using low-frequency data," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 375-400, August.
    6. Tim Brailsford & Clive Gaunt & Michael A O’Brien, 2012. "Size and book-to-market factors in Australia," Australian Journal of Management, Australian School of Business, vol. 37(2), pages 261-281, August.
    7. Brendan Elliot & Paul Docherty & Stephen Easton & Doowon Lee, 2018. "Profitability and investment†based factor pricing models," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 397-421, June.
    8. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    9. Mardy Chiah & Daniel Chai & Angel Zhong & Song Li, 2016. "A Better Model? An Empirical Investigation of the Fama–French Five-factor Model in Australia," International Review of Finance, International Review of Finance Ltd., vol. 16(4), pages 595-638, December.
    10. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    12. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
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    Cited by:

    1. Ang (Chewie), Tze Chuan & Hayat, Aziz & Li, Bob, 2020. "Short-selling risk in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    2. Alexey Komzolov & Tatiana Kirichenko & Olga Kirichenko & Yulia Nazarova & Natalya Shcherbakova, 2021. "The Problem of Determining Discount Rate for Integrated Investment Projects in the Oil and Gas Industry," Mathematics, MDPI, vol. 9(24), pages 1-13, December.
    3. Robert W. Faff, 2019. "Adopting a Structured Abstract Design to More Effectively Catch Reader Attention: An Application of the Pitching Research® Framework," Capital Markets Review, Malaysian Finance Association, vol. 27(2), pages 1-13.
    4. Chai, Daniel & Chiah, Mardy & Zhong, Angel, 2020. "Decomposing value: Changes in size or changes in book-to-market?," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    5. Zhang, Xinyue & Bissoondoyal-Bheenick, Emawtee & Zhong, Angel, 2023. "Investor sentiment and stock market anomalies in Australia," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 284-303.
    6. Yao, Haixiang & Xia, Shenghao & Liu, Hao, 2022. "Six-factor asset pricing and portfolio investment via deep learning: Evidence from Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    7. David R. Gallagher & Graham Harman & Camille H. Schmidt & Geoffrey J. Warren, 2022. "Global equity fund performance adjusted for equity and currency factors," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1535-1565, April.

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    More about this item

    Keywords

    Asset pricing models; Fama–French factors; Spanning tests;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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