The fama french five factor asset pricing model on the JSE

Abstract

The aim of the research project was to evaluate a number of asset pricing models hinging around the latest research by Gene Fama and Kenneth French who proposed a five-factor asset pricing models using independent variables of: the return of the whole market relative to a risk free investment, value, investment, profitability and size. Previous research had evaluated the model in a number of locations around the world with different results for different regions. Thus, understanding the five factor model in the context of the Johannesburg Stock Exchange (JSE) was a worthwhile academic exercise in addition to being useful to business. In total, 15 asset pricing models were analysed with combinations of the five factors evaluated. This ranged from the simplest model, the single factor Capital Asset Pricing Model (CAPM), to the full five factor model. Results show that the five factor model provided the best explanation of share behaviour on the JSE out of all models evaluated. Other findings included: the CAPM does not work well as an explanatory model, more factors in an asset pricing model generally give better results and the results from models with the same number of factors are fairly close together.