A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market

Ragab, Nada S.; Abdou, Rabab K.; Sakr, Ahmed

doi:10.5539/ijef.v12n1p52

Cited by 19 publications

(16 citation statements)

References 27 publications

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“…The results indicate that the Fama and French three-factor model cannot explain excess stock returns in the EGX. These results contradict the findings of Shaker and Elgiziry (2014), Shaker and Abdeldayem (2018), and Ragab et al (2019), who supported the Fama and French three-factor model (1993) in the EGX. Our results do not support the Fama and French three-factor model (1993).…”

Section: Testing Herd Behaviourcontrasting

confidence: 96%

The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

Abd-Alla¹,

Sobh²

2020

FAI

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We test the impact of herding behaviour on the risk pricing in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting herding behaviour to the Fama and French three-factor model. We construct a portfolio to mimic an additional risk factor related to herding behaviour, in addition to the original risk factors in the Fama and French three-factor model. The three-factor model will be tested in its original form and re-tested after adding the herding behaviour factor. The study is based on Hwang and Salmon methodology, in which the state space approach based on Kaman’s filter was used to measure herding behaviour. We used monthly excess stock returns of 50 stocks listed on the EGX from January 2014 to December 2018. The results do not support Fama and French model before and after adding the herding behaviour factor, therefore, there is no effect of herding behaviour on the risk pricing in the Egyptian Stock Exchange.

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Section: Testing Herd Behaviourcontrasting

confidence: 96%

The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

Abd-Alla¹,

Sobh²

2020

FAI

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“…Three sets of portfolios were used as test assets to find relationships between Egypt's stock market returns and size, the BE/ME ratio, operating profitability, and investments. Results reveal that the most significant effect is the size effect, and the five-factor model offers a complete explanation of the stock returns in the Egyptian stock market [9].…”

Section: Introductionmentioning

confidence: 91%

Analysis of Four Technology Related Industries Before and After COVID-19 Based on Fama-French Five-Factor Model

Wang¹,

Zhou²,

Zhou³

2021

Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)

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The COVID-19 devastated the U.S. economy dramatically, which broke the largest shrank record from 1947. The U.S. stock market faced a series of huge fluctuations during the pandemic. Due to more stimulated injection policies and online communication demands, the U.S. technology industry faced a structural bull market in 2020. Given that technology-related industries are critical to a country's development, it is worthwhile paying more attention to the impact of the unprecedented COVID-19 outbreak on those industries, especially how assets are priced differently before and after the outbreak. This study investigates and evaluates changes in the Fama-French Five-Factor Model factors before and after the COVID-19 outbreak for four crucial US technology-related industries (namely hardware, software, chips, and lab equipment industries), which provides suggestions regarding investment strategies of the four industries according to the findings. In addition, the Data from the Kenneth R. French Data Library were used to conduct multiple linear regression. The result demonstrates that the pandemic has profoundly impacted these industries, which can be embodied by the change in significant factors (CMA, RMW, HML) in each market, respectively. In contrast, there is no change in significant factors in the lab equipment industry. In conclusion, COVID-19 has altered both the magnitude and significance of multiple Fama-French Five-Factor Model factors for the industries, and investors should adjust their investment strategies accordingly when investing in different industries to benefit from higher stock returns.

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“…Moreover, Li et.al [9] demonstrated the validity of the five-factor model on the U.S. stock market through their testing of a new pricing model. Furthermore, Ragab et.al [6] compared the Fama and French three-factor model and five-factor on the Egyptian stock market using time-series regression and the Gibbons Ross Shanken (GRS) test, and they revealed that the five-factor model provides a better explanation of stock returns in Egyptian Stock market based on the adjusted R2 and the values from the GRS test.…”

Section: A Literature Reviewmentioning

confidence: 99%

“…After the empirical success of the Fama and French threefactor model, many researchers found additional patterns such as investment and profitability that are related to the average return stocks [6]. So Fama and French decided to incorporate the two factors profitability and investment into their previous threefactor model and developed a five-factor model.…”

Section: Fama and French Five-factir Modelmentioning

confidence: 99%

“…Recently, Fama and French [5] added another two factors, profitability (RMW) and investment (CMA) to the three-factor model and this five-factor model was found to be a better tool for evaluating performances than the three-factor model. Even though Fama and French showed that the Fama and French fivefactor model has more explanatory power than the precedent three-factor model in explaining stocks' returns, they highlight the need to empirically test the model to different markets and time periods to analyze their robustness [6]. In this regard, many previous researchers have tested the validity of the Fama and French five-factor model in different markets.…”

Section: Introductionmentioning

confidence: 99%

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Analysis of COVID-19 on Service Industry Based on Fama and French Five-Factor Model

Liu

2020

2020 Management Science Informatization and Economic Innovation Development Conference (MSIEID)

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The Fama and French five-factor model was developed as an expansion of the previous Fama and French threefactor model, where the five-factor model included two additional factors profitability and investment to the existing three factors market, size, and value to better estimate the expected return of the security. As COVID-19 had negatively impacted the economy in the U.S., this study applied the Fama and French five-factor model to examine the performance of the service industry before and after the outbreak of COVID-19 using the dataset from Kenneth R. French Data Library and draw insight about the prospect of the service industry. The estimated coefficients as well as the t-statistics of the five factors for before and after the outburst of COVID-19 periods were computed and analyzed. The result showed that all five factors market, size, value, profitability, and investment were statistically significant during the COVID-19 period, with changes in some of the factors after the hit of the pandemic, revealing the return of service industry is associated with the five factors. Specificially, investors during this crisis and in the future should be more cautious toward service businesses that have smaller-cap, weak profitability and less investment activities.

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A Comparative Study between the Fama and French Three-Factor Model and the Fama and French Five-Factor Model: Evidence from the Egyptian Stock Market

Cited by 19 publications

References 27 publications

The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

The Impact of Herding on the Risk Pricing in the Egyptian Stock Exchange

Analysis of Four Technology Related Industries Before and After COVID-19 Based on Fama-French Five-Factor Model

Analysis of COVID-19 on Service Industry Based on Fama and French Five-Factor Model

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