Investigating linear multi-factor models in asset pricing: considerable supplemental evidence

Qi Shi, Wai-Kong Cheung, Bin Li

Research output: Contribution to journalArticlepeer-review

Abstract

The literature has offered an interesting debate about whether the performance of Fama-French’s three-factor benchmark model is inadequate because it fails to pass some model specification tests and its R2 is not convincingly high in cross-sectional estimations. Previous studies have been quite limited, since they only focused on the time-series procedure with many models. We extend their work by providing a more robust investigation of the performance of several well-regarded pricing models in pooled portfolios and other portfolios sorted by new and important anomalies, using cross-sectional GMM tests for robustness. Finally, we find that, in addition to Fama and French’s five-factor model proposed in 1993, Fama-French’s three-factor model augmented by other factors usually outperforms Fama-French’s three-factor model across a significant proportion of different portfolios. In particular, Frazzini, Kabiller, and Pedersen’s model shows the best overall performance and consistency across different portfolios.

Original languageEnglish
Pages (from-to)242-260
Number of pages19
JournalAsia-Pacific Journal of Accounting & Economics
Volume27
Issue number2
Early online date2018
DOIs
Publication statusPublished - 3 Mar 2020

Keywords

  • asset pricing models
  • consistency
  • different portfolios
  • Expanding portfolios

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