Comparative Empirical Evidence of a Three-factor Model and a Five-factor Model Based on Anomalous Studies

Research Article
Open access

Comparative Empirical Evidence of a Three-factor Model and a Five-factor Model Based on Anomalous Studies

Zhiling Gu 1 , Jiayi Zhao 2*
  • 1 Hubei Engineering University    
  • 2 Xi'an University of Finance and Economics    
  • *corresponding author Jia_yiZhao@xaufe.edu.cn
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/15/20230911
AEMPS Vol.15
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-73-7
ISBN (Online): 978-1-915371-74-4

Abstract

The Fama-French three-factor model explains the magnitude of stock market returns by constructing three variable factors. The five-factor model adds two more factors to the three-factor model to provide a more accurate explanation of stock re-turns. These two factors have been widely used in the industry for decades since their inception. As China's securities industry has developed late, research on the stock industry has been more oriented towards empirical studies of the three-factor and five-factor models, and less research has been conducted on many financial anomalies that cannot be explained by traditional financial theory. This paper systematically describes the origins of factor anomaly research and five-factor anomaly research on the A-share market from 1997 to 2020, constructs new factors, compares and summarizes them with the old ones, and concludes that the three-factor anomaly model and five-factor anomaly model are not yet able to adequately explain A-share stocks and have larger errors when conducting empirical evidence; in contrast, the CPAM anomaly model can better conduct anomaly research, and the resulting In contrast, the CPAM is more suitable for the empirical study of anomalies and can pro-vide investors with more effective investment strategies and recommendations.

Keywords:

three-factor model, five-factor model, anomaly study, asset pricing, yield

Gu,Z.;Zhao,J. (2023). Comparative Empirical Evidence of a Three-factor Model and a Five-factor Model Based on Anomalous Studies. Advances in Economics, Management and Political Sciences,15,183-192.
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References

[1]. Xu Bu. The impact of pricing factor selection on stock market anomaly tests [J]. Jianghan Forum, 2017 (9): 30-36.

[2]. Xie YJ,Pricing anomalies in Chinese capital markets based on a five-factor model - Empirical evidence from liquidity firms[J]. Journal of Business and Economic Research, 2019(11):164-168.

[3]. Hu Jingkai. An empirical analysis of the impact of financial anomaly factors on the Chinese stock market [D]. Beijing: University of Foreign Trade, 2019.

[4]. Fama, E. and Kenneth R. French.Common risk factors in the returns on stocks and bonds [ J]. Journal of Financial Economics, 1993, 33:3-56.

[5]. Banz R.W..There latio nship betw een return and market value of common stocks [ J]. Journal of Financial Ecomomics, 1981 (9):3-18.

[6]. Stattma n D.Book values and stock returns [ J] .The Chicago MBA :A Journal of Selected Papers, 1980 ,(4):25 -45 .

[7]. Bhandari, Laxmi Chand. Debt/ Equity ratio and expected common stock returns: Empirica l ev idence[ J] .Journal of Finance , 1988 ,(43):507-528 .

[8]. Gaunt C ... Size and book to market effects and the Fama French three factor asset pricing model:evidence from the Australian Stock Market[ J] .Accounting and Finance , 2004, (44):27-44.

[9]. Yang Jianwei, Jiang Fu. An empirical study of cross-sectional expected returns in the Chinese stock market [ J]. Journal of Shanghai Jiaotong University, 2004, (3):326 -329.

[10]. Meng Q.S. The FF three-factor model for the Shanghai stock market [ J]. Journal of Beihua University (Social Science Edition), 2004, (3):79 -81.

[11]. Fama E F, French K R. A five-factor asset pricing model [J]. Journal of Financial Economics, 2015, 116(1):1-22.

[12]. Fu Xiaoqian, Qiu Feng, Zhang Qian. An empirical study based on the effectiveness of capital asset pricing in China's Shanghai and Shenzhen A-share markets[J]. Hebei Enterprise, 2022(7):10-12.

[13]. Li J. A comparative study of the Fama-French five-factor and three-factor - with A-share agriculture, forestry, animal husbandry and fishery [D]. Beijing: Foreign Affairs Institute, 2021.

Cite this article

Gu,Z.;Zhao,J. (2023). Comparative Empirical Evidence of a Three-factor Model and a Five-factor Model Based on Anomalous Studies. Advances in Economics, Management and Political Sciences,15,183-192.

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The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2nd International Conference on Business and Policy Studies

ISBN：978-1-915371-73-7(Print) / 978-1-915371-74-4(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.confbps.org/
Conference date: 26 February 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.15
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Xu Bu. The impact of pricing factor selection on stock market anomaly tests [J]. Jianghan Forum, 2017 (9): 30-36.

[2]. Xie YJ,Pricing anomalies in Chinese capital markets based on a five-factor model - Empirical evidence from liquidity firms[J]. Journal of Business and Economic Research, 2019(11):164-168.

[3]. Hu Jingkai. An empirical analysis of the impact of financial anomaly factors on the Chinese stock market [D]. Beijing: University of Foreign Trade, 2019.

[4]. Fama, E. and Kenneth R. French.Common risk factors in the returns on stocks and bonds [ J]. Journal of Financial Economics, 1993, 33:3-56.

[5]. Banz R.W..There latio nship betw een return and market value of common stocks [ J]. Journal of Financial Ecomomics, 1981 (9):3-18.

[6]. Stattma n D.Book values and stock returns [ J] .The Chicago MBA :A Journal of Selected Papers, 1980 ,(4):25 -45 .

[7]. Bhandari, Laxmi Chand. Debt/ Equity ratio and expected common stock returns: Empirica l ev idence[ J] .Journal of Finance , 1988 ,(43):507-528 .

[8]. Gaunt C ... Size and book to market effects and the Fama French three factor asset pricing model:evidence from the Australian Stock Market[ J] .Accounting and Finance , 2004, (44):27-44.

[9]. Yang Jianwei, Jiang Fu. An empirical study of cross-sectional expected returns in the Chinese stock market [ J]. Journal of Shanghai Jiaotong University, 2004, (3):326 -329.

[10]. Meng Q.S. The FF three-factor model for the Shanghai stock market [ J]. Journal of Beihua University (Social Science Edition), 2004, (3):79 -81.

[11]. Fama E F, French K R. A five-factor asset pricing model [J]. Journal of Financial Economics, 2015, 116(1):1-22.

[12]. Fu Xiaoqian, Qiu Feng, Zhang Qian. An empirical study based on the effectiveness of capital asset pricing in China's Shanghai and Shenzhen A-share markets[J]. Hebei Enterprise, 2022(7):10-12.

[13]. Li J. A comparative study of the Fama-French five-factor and three-factor - with A-share agriculture, forestry, animal husbandry and fishery [D]. Beijing: Foreign Affairs Institute, 2021.

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