Fama- French Five-factor model: Evidence from Viet Nam

Abstract

The study investigates the explanatory power of the Five-factor model. I will find out: Does market risk fully explain the average stock returns? Whether the Fama – French five-factor model has the ability to capture the average stock returns in Viet Nam Stock market during the period from 2011 to 2015 and whether Investment factor and Profitability factor are relevant.

The data in question is from 1/1/2011 to 31/12/2015. The Data included all listed stocks on Ha Noi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE)– the two stock exchanges of Viet Nam. The reason for choosing the period in question is to avoid the impact of financial crisis and real estate bubble in Viet Nam in 2008 and 2009.

Results show that the explanatory power of CAPM, three-factor model, and five-factor model are quite disappointing. The five-factor model has the highest R-square, but it is only 34 percent. From CAPM model to five-factor model, the R-square increases gradually and insignificantly. Two added variables (RMW and CMA) are not significant in explaining the stock returns. RMW and CMA are insignificant in capturing the variation of other factors. The results also indicate that RMW and CMA largely absorb the effects of other factors. The five-factor model has superior explanatory power over the large size portfolio, high book to market ratio portfolio, robust profitability portfolio, and aggressive investment portfolio.