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Applicability of Investment and Profitability Effects in Asset Pricing Models

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  • Márcio André Veras Machado
  • Robert Faff
  • Suelle Cariele de Souza e Silva

Abstract

This study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French's (2015) five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson's (2007) five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015).

Suggested Citation

  • Márcio André Veras Machado & Robert Faff & Suelle Cariele de Souza e Silva, 2017. "Applicability of Investment and Profitability Effects in Asset Pricing Models," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 21(6), pages 851-874.
    • Handle: RePEc:abg:anprac:v:21:y:2017:i:6:1248
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    References listed on IDEAS

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    1. Ammann, Manuel & Odoni, Sandro & Oesch, David, 2012. "An alternative three-factor model for international markets: Evidence from the European Monetary Union," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1857-1864.
    2. Aharoni, Gil & Grundy, Bruce & Zeng, Qi, 2013. "Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis," Journal of Financial Economics, Elsevier, vol. 110(2), pages 347-357.
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    Cited by:

    1. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Profitability of momentum strategies in Latin America," International Review of Financial Analysis, Elsevier, vol. 70(C).

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