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

44 Pages Posted: 7 Dec 2016

See all articles by Mardy Chiah

Mardy Chiah

Swinburne University of Technology

Daniel Chai

Monash University

Angel Zhong

RMIT University - School of Economics, Finance and Marketing

Song LI

Monash Business School

Multiple version iconThere are 3 versions of this paper

Date Written: December 2016

Abstract

Recently, Fama and French ([Fama, E. F., 2015a]) 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 ([Fama, E. F., 1993]). Using an extensive sample over the 1982–2013 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 a range of competing asset pricing models, which supports the superiority of the five‐factor model. We also find that despite the results documented by Fama and French ([Fama, E. F., 2015a]), the book‐to‐market factor retains its explanatory power in the presence of the investment and profitability factors. Our results are robust to alternative factor definitions and the formation of test assets. The study provides a strong out‐of‐sample test of the model, adding to the comparative evidence across international equity markets.

Suggested Citation

Chiah, Mardy and Chai, Daniel and Zhong, Angel and Li, Song, A Better Model? An Empirical Investigation of the Fama–French Five‐Factor Model in Australia (December 2016). International Review of Finance, Vol. 16, Issue 4, pp. 595-638, 2016, Available at SSRN: https://ssrn.com/abstract=2881023 or http://dx.doi.org/10.1111/irfi.12099

Mardy Chiah (Contact Author)

Swinburne University of Technology ( email )

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3122 Victoria, Victoria 3122
Australia

Daniel Chai

Monash University ( email )

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Wellington Road
Clayton, Victoria 3800
Australia

Angel Zhong

RMIT University - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Song Li

Monash Business School ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
+61 3 99034529 (Phone)

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