51 Pages Posted: 3 May 2015 Last revised: 15 Oct 2015
Date Written: October 14, 2015
In this paper, I examine the five-factor model in 23 developed stock markets. Using the firm level data from July 1992 to December 2014, I form the 25 size-book to market, the 25 size-gross profitability (GP), and the 25 size-investment (Inv) portfolios. I use three factor, four factor and five factor models to explain the returns on these portfolios using regional as well as global factors. I find that the results for the five-factor model in North America, Europe, and Global markets are similar to the results for the U.S. stock market. But the results for gross profitability (GP) and investment (Inv.) suggest that these two new factors either do not add any explanatory power or are much weaker in Japan and Asia Pacific portfolios. The results also suggest that regional models perform much better than global models. This may imply that markets are still not fully integrated. With inclusion of the two new factors, the value factor still remains significant in all regions in contrast to the US market results.
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By Andrew Ang