Fama-French Five-Factor Model: Construction and China A-Share Tests

Summary

This article explains how the Fama-French model extends CAPM first with size and value factors, then with profitability and investment factors. It describes double sorts by size and book-to-market, return on equity, or asset growth, and forms RMW from robust-minus-weak profitability portfolios and CMA from conservative-minus-aggressive investment portfolios. It also discusses changes to the size factor when the two additional factors are included.

An empirical example uses CSI 300 stocks over 2018–2021. It reports weak or negative returns for several factors, a relatively high correlation between HML and CMA, and a GRS result that rejects joint zero pricing errors for the tested assets. Regressions suggest the model explains much of the returns of size-sorted valuation portfolios, though some alphas remain significant. Results are specific to this universe and period, and the article contains inconsistencies in labels and interpretation, so they should not be treated as general evidence of model performance.

Key ideas

• The five-factor model adds profitability and investment exposures to the market, size, and value factors.
• Size and accounting characteristics are combined in independent double sorts to form factor portfolios.
• RMW compares robust-profitability portfolios with weak-profitability portfolios, while CMA compares conservative investment with aggressive investment.
• In the CSI 300 sample, the reported GRS test rejects the hypothesis that all pricing errors are jointly zero.
• The reported regressions show explanatory power for valuation-sorted portfolios, but the evidence is limited to the stated sample and period.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.