Fama French Five Factor Asset Pricing Model
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Abstract
In 2015 Fama and French proposes a five-factor model by adding profitability and investment factors to their three-factor model. Fama and French Five factor model outperforms the three- factor model previously proposed by Fama and French (1993). Many researchers find that five factor model explains assets pricing anomalies better than the range of competing assets pricing models. But the main problem with five-factor model is its failure to capture the low average returns on small stocks whose returns behave like those firms who invests a lot despite low profitability. The model’s performance is not sensitive to the way its factors are defined.
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References
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