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    Investigating linear multi-factor models in asset pricing: considerable supplemental evidence*

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    Authors
    Shi, Q.
    Cheung, Adrian
    Li, B.
    Date
    2018
    Type
    Journal Article
    
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    Citation
    Shi, Q. and Cheung, A. and Li, B. 2018. Investigating linear multi-factor models in asset pricing: considerable supplemental evidence*. Asia-Pacific Journal of Accounting and Economics.
    Source Title
    Asia-Pacific Journal of Accounting and Economics
    DOI
    10.1080/16081625.2017.1419878
    ISSN
    1608-1625
    School
    School of Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/72674
    Collection
    • Curtin Research Publications
    Abstract

    The literature has offered an interesting debate about whether the performance of Fama-French’s three-factor benchmark model is inadequate because it fails to pass some model specification tests and its R2 is not convincingly high in cross-sectional estimations. Previous studies have been quite limited, since they only focused on the time-series procedure with many models. We extend their work by providing a more robust investigation of the performance of several well-regarded pricing models in pooled portfolios and other portfolios sorted by new and important anomalies, using cross-sectional GMM tests for robustness. Finally, we find that, in addition to Fama and French’s five-factor model proposed in 1993, Fama-French’s three-factor model augmented by other factors usually outperforms Fama-French’s three-factor model across a significant proportion of different portfolios. In particular, Frazzini, Kabiller, and Pedersen’s model shows the best overall performance and consistency across different portfolios.

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