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

Abstract

Recently, Fama and French (2014) document a five-factor model that includes the market and factors related to size, book-to-market, profitability and investment outperforms the three-factor model of Fama and French (1993). Using an extensive sample over the period 1982 to 2013, we investigate the performance of the five-factor model in pricing Australian equities. We find that the five-factor is able to explain more asset-pricing anomalies than the three-factor model, which supports the superiority of the five-factor model. In contrast to that documented in Fama and French (2014), the book-to-market factor is found to remain 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