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Does Five-Factor Model Perform Better Than Three Factor Model? Evidence from Developed Countries of The Asia Pacific Region

Author

Listed:
  • Ume Salma Akbar
  • Niaz Ahmed Bhutto
  • Suresh Kumar Oad Rajput

    (Society for Democracy and Human Development (SDHD), Pakistan.)

Abstract

This study evaluates whether the “Fama-French five-factor model” can explain the variations in expected returns better than the “three-factor model.” Using the stock returns and accounting variable data from DataStream for 1,300 plus listed firms across six developed countries of the Asia Pacific region, including; Australia, Hong Kong, Japan, Israel, New Zealand, and Singapore for the period of Jun-2006 to February-2020. The paper is the first to examine the “five-factor model” performance across the developed countries of the Asia Pacific region. The empirical findings reveal that the Asia Pacific region for the sample period earns an equity premium. In addition, results report the redundancy of size factor (SMB) and value factor (HML), while the profitability (RMW) and investment premium (CMA) are positive and significant. Moreover, the study used Gibbons, Ross, and Shanken (GRS) test to the asset pricing model. The GRS test results on the “five-factor model” compared with the “three-factor model” demonstrate that profitability and investment factors add significant explanatory power to the analysis in the Asia Pacific region.

Suggested Citation

  • Ume Salma Akbar & Niaz Ahmed Bhutto & Suresh Kumar Oad Rajput, 2021. "Does Five-Factor Model Perform Better Than Three Factor Model? Evidence from Developed Countries of The Asia Pacific Region," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 3(2), pages 119-132, September.
    • Handle: RePEc:ani:irdjoe:v:3:y:2021:i:2:p:119-132
    DOI: https://doi.org/10.52131/joe.2021.0302.0030
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    References listed on IDEAS

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    1. Keiichi Kubota & Hitoshi Takehara, 2018. "Does the Fama and French Five†Factor Model Work Well in Japan?," International Review of Finance, International Review of Finance Ltd., vol. 18(1), pages 137-146, March.
    2. Barillas, Francisco & Kan, Raymond & Robotti, Cesare & Shanken, Jay, 2020. "Model Comparison with Sharpe Ratios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(6), pages 1840-1874, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Liquidity Risk; Credit Risk; Bank Performance; Dynamic Panel; Iraq;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O56 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Oceania
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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