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Does the Fama and French Five‐Factor Model Work Well in Japan?
Author(s) -
Kubota Keiichi,
Takehara Hitoshi
Publication year - 2018
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12126
Subject(s) - capital asset pricing model , profitability index , econometrics , economics , explanatory power , factor analysis , generalized method of moments , investment (military) , financial economics , panel data , finance , philosophy , epistemology , politics , political science , law
In this study, we investigate whether the five‐factor model by Fama and French (2015) explains well the pricing structure of stocks with long‐run data for Japan. We conduct standard cross‐section asset pricing tests and examine the additional explanatory power of the new Fama and French factors; robust‐minus‐weak profitability factor and conservative‐minus‐aggressive investment factor. We find that robust‐minus‐weak and the conservative‐minus‐aggressive factors are not statistically significant when we conduct generalized method of moments (GMM) tests with the Hansen–Jagannathan distance measure. Thus, we conclude that the original version of the Fama and French five‐factor model is not the best benchmark pricing model for Japanese data during our sampling period from the year 1978 to the year 2014.