Abstract
This paper presents a comparative analysis of three asset pricing models, namely, the Capital Asset Pricing Model (CAPM), the Fama-French Three Factor Model (FF3), and the Fama-French Five Factor Model (FF5), using six market portfolios generated from NYSE, AMEX, and NASDAQ stocks. The research aims to investigate which model has the best performance in terms of goodness of fit using ANOVA testing. Contrary to the traditional assumption that FF5 outperforms the other two, the study reveals that FF3 has the best performance in terms of the smallest RRS in ANOVA testing. The paper also discusses the effect of adding more regressors to CAPM and transitioning to FF5. The results confirm that FF models have general improvements from CAPM in accuracy and completeness, but there is a trivial increase in performance by adding the additional investment factor and profitability factor to FF3. The success of various asset pricing models is better understood due to this research, which can help with investing choices and portfolio management tactics. The findings have implications for practitioners and policymakers in the financial industry.
Z. Chen, Z. Sun and X. Wang—These authors contributed equally.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Sharpe, W.F.: Capital asset prices: a theory of market equilibrium under conditions of risk. J. Financ. 19(3), 425–442 (1964)
Lintner, J.: Security prices, risk, and maximal gains from diversification*. J. Financ. 20(4), 587–615 (1965)
Fama, E.F., French, K.R.: Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33(1), 3–56 (1993)
Fama, E.F., French, K.R.: A five-factor asset pricing model. J. Financ. Econ. 116(1), 1–22 (2015)
Hogan, W.W., Warren, J.M.: Toward the development of an equilibrium capital-market model based on semivariance. J. Financ. Quant. Anal. 9(1), 1–11 (1974)
Pástor, Ľ., Stambaugh, R.F.: Liquidity risk and expected stock returns. J. Polit. Econ. 111(3), 642–685 (2003)
Hansen, L.P., Richard, S.F.: The role of conditioning information in deducing testable restrictions implied by dynamic asset pricing models. Econometrica 55(3), 587–613 (1987)
Merton, R.C.: An intertemporal capital asset pricing model. Econometrica 41(5), 867–887 (1973)
Lucas, R.E.: Asset prices in an exchange economy. Econometrica 46(6), 1429–1445 (1978)
Breeden, D.T.: An intertemporal asset pricing model with stochastic consumption and investment opportunities. J. Financ. Econ. 7(3), 265–296 (1979)
Raei, R.: A study on develo** of asset pricing models. Int. Bus. Res. 4(4), 139–152 (2011)
Reilly, F.K., Brown, K.C.: Investment Analysis and Portfolio Management, 6th edn. The Dryden Press, Harcourt College Publishers, New York (2000)
Cochrane, J.H.: Asset Pricing. Princeton University Press, Princeton (2005)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2024 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.
About this paper
Cite this paper
Chen, Z., Sun, Z., Wang, X. (2024). An Empirical Analysis of Asset Pricing Models. In: Li, X., Yuan, C., Kent, J. (eds) Proceedings of the 7th International Conference on Economic Management and Green Development. ICEMGD 2023. Applied Economics and Policy Studies. Springer, Singapore. https://doi.org/10.1007/978-981-97-0523-8_93
Download citation
DOI: https://doi.org/10.1007/978-981-97-0523-8_93
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-97-0522-1
Online ISBN: 978-981-97-0523-8
eBook Packages: Economics and FinanceEconomics and Finance (R0)