An empirical investigation of the Fama-French five-factor model

Abstract

The article deals with evaluating the securities portfolios in the process of transition from the one-factor CAPM model to the Fama-French five-factor model (FF5F). It identifies the advantages of the latter and discusses the controversial issues regarding its use by portfolio investors in different countries, given the anomalies inherent in asset pricing. Besides, the peculiarities of the statistical stratification method used in the FF5F model to group stock portfolios are revealed, and attention is drawn to some of the debating points of the five-factor model. The proposals have been formulated, which offer broader avenues for taking advantage of the FF5F model and increase the validity of the portfolio analysis results. The article also gives recommendations on modifying the approaches to analyzing small-size portfolios versus big-size portfolios based on partial changes in RMW and CMA factors, threshold proportions, and the use of STARR for asymmetric portfolios. The study substantiates the use of these approaches in testing the Fama-French five-factor model with portfolios composed of blue chips.