Testing Fama–French’s new five-factor asset pricing model: evidence from robust instruments

ABSTRACT

Fama and French (FF, 2015) propose a five-factor asset pricing model that captures size, value, profitability and investment patterns. The primary purpose here is to further investigate this new model using an improved GMM-based robust instrumental variables technique. A further purpose is to explore the relationship among the FF factors and the Pástor–Stambaugh (PS, 2003) liquidity factor. We conclude that except for the market factor, all of the factors including liquidity are not significant at even the 5% level using our GMM approach for almost all of the FF 12 sectors.

KEYWORDS:

• Fama–French five-factor model
• Pástor–Stambaugh model
• liquidity
• investment
• profitability
• robust instruments
• GMM
• Hausman test

JEL CLASSIFICATION:

• G12
• C13

Notes

¹ The data for the five FF factors are available from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

² The marginal Q is the net present value of future cash flows generated from an additional unit of assets. Note that Equation 3 is derived equating the marginal benefit to marginal cost.

³ French’s website is http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. The sectors are Nodur, Durbl, Manuf, Enrgy, Chems, BusEq, Telcm, Utils, Shops, Hlth, Money and Other.

⁴ Pástor’s website is http://faculty.chicagobooth.edu/lubos.pastor/research/liq_data_1962_2012.txt

⁵ Table values are available from the authors on request.