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Testing alternative versions of the Fama–French five-factor model in the UK

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  • James Foye

    (University of Ljubljana)

Abstract

This paper evaluates whether the new Fama–French five-factor model is able to offer an improved method for pricing investment risk in UK equity returns. The paper extends previous studies by testing alternative specifications of the profitability factor. The initial tests indicate that a respecified five-factor model—using gross profit rather than operating profit—provides an improved description of UK equity returns. However, the factors tested perform inconsistently when evaluated against different test portfolios and neither the value nor investment premiums are consistently priced. As well as highlighting the importance of testing factor models using an array of different test portfolios, the results show that both the three- and five-factor models are unable to offer a convincing description of UK equity returns and therefore cannot be considered a reliable measure of financial risk.

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  • James Foye, 2018. "Testing alternative versions of the Fama–French five-factor model in the UK," Risk Management, Palgrave Macmillan, vol. 20(2), pages 167-183, May.
    • Handle: RePEc:pal:risman:v:20:y:2018:i:2:d:10.1057_s41283-018-0034-3
    DOI: 10.1057/s41283-018-0034-3
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    References listed on IDEAS

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    1. Mª Caridad Sevillano & Francisco Jareño, 2018. "The impact of international factors on Spanish company returns: a quantile regression approach," Risk Management, Palgrave Macmillan, vol. 20(1), pages 51-76, February.
    2. Alan Gregory & Rajesh Tharyan & Angela Christidis, 2013. "Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(1-2), pages 172-214, January.
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    Cited by:

    1. Foye, James & Valentinčič, Aljoša, 2020. "Testing factor models in Indonesia," Emerging Markets Review, Elsevier, vol. 42(C).

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