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Five Concerns with the Five-Factor Model

17 Pages Posted: 5 Nov 2016 Last revised: 23 Feb 2017

David Blitz

Robeco Asset Management - Quantitative Strategies

Matthias X. Hanauer

Robeco Asset Management - Quantitative Strategies; Technische Universität München (TUM)

Milan Vidojevic

VU University Amsterdam, Finance; Robeco Asset Management

Pim van Vliet

Robeco Asset Management - Quantitative Strategies

Date Written: November 1, 2016

Abstract

Fama and French (2015) propose to augment their classic (1993) 3-factor model with profitability and investment factors, resulting in a 5-factor model, which is likely to become the new benchmark for asset pricing studies. Although the 5-factor model exhibits significantly improved explanatory power, we identify five concerns with regard to the new model. First, it maintains the CAPM relation between market beta and return, despite mounting evidence that the empirical relation is flat, or even negative. Second, it continues to ignore the, by now, widely accepted momentum effect. Third, there are a number of robustness concerns with regard to the two new factors. Fourth, whereas risk-based explanations were key for justifying the factors in the 3-factor model, the economic rationale for the two new factors is much less clear. Fifth and finally, it does not seem likely that the 5-factor model is going to settle the main asset pricing debates or lead to consensus.

Keywords: asset pricing, 5-factor model, 3-factor model, CAPM, low-beta, momentum

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Hanauer, Matthias X. and Vidojevic, Milan and van Vliet, Pim, Five Concerns with the Five-Factor Model (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2862317

David Blitz (Contact Author)

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Matthias Xaver Hanauer

Robeco Asset Management - Quantitative Strategies ( email )

Coolsingel 120
Rotterdam, 3011 AG
Netherlands

HOME PAGE: http://www.robeco.com/en/about-us/quantitative-research-team.jsp

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.fm.wi.tum.de/?id=31

Milan Vidojevic

VU University Amsterdam, Finance ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Pim Van Vliet

Robeco Asset Management - Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

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