A Better Model? An Empirical Investigation of the Fama-French Five-Factor Model in Australia

Abstract

Recently, Fama and French (2014) propose a five-factor model by adding profitability and investment factors to their three-factor model. This model outperforms the three-factor model previously proposed by Fama and French (1993). Using an extensive sample over the 1982 to 2013 period, we investigate the performance of the five-factor model in pricing Australian equities. We find that the five-factor model is able to explain more asset-pricing anomalies than the three-factor model, which supports the superiority of the five-factor model. We also find that despite the results documented by Fama and French (2014), the book-to-market factor retains its explanatory power in the presence of the investment and profitability factors. Our study provides an update to the existing Australian asset pricing literature.

Keywords: Size; Book-to-market; Asset pricing; Fama-French model; Australian evidence

JEL Classification: G12