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An empirical test of the Fama-French five-factor model: Applicability to equitized state-owned enterprises in Vietnam
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School of Business |
Master's thesis
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en
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79 + 5
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Research Objectives – Asset pricing is one of the most popular topics in financial economics that has been studied for decades as various theories and models were established in this field. However, most of these studies were conducted for the markets in the United States or other developed countries, which can have questionable implications in the emerging and frontier markets. Thus, this thesis aims to fill the research gap by selecting Vietnam’s stock market as the market of interest. Besides, this thesis also explores a special segment pertaining to the market: equitized state-owned enterprises (SOEs) by investigating the relationship between average stock returns and state-ownership status. With respect to the model of interest, this thesis will focus on the Fama-French five-factor model and its relative performance to others including the Capital Asset Pricing Model (CAPM) and the Fama-French three-factor model. The underlying rationale for this selection is that the five-factor is a recent model, which was first introduced in 2015, and since then there have been mixed results from empirical tests of this model across different markets. Therefore, there emerges a need to conduct research on this topic, especially for a developing and under-researched market like Vietnam.
Data & Methodology – The thesis will examine monthly returns of common stocks listed on both Ho Chi Minh Stock Exchange and Hanoi Stock Exchange from July 2009 to December 2017, 102 months in total. The sample will be rebalanced annually in June from 2009 to 2017. The sample size amounts to 620 companies after the last rebalance in June 2017. Asset pricing tests will be implemented to investigate the explanatory performance of each model by regressing excess returns of test portfolios on factor returns. Besides, the factor spanning tests will help to determine whether any factor in the five-factor model is redundant by regressing each of the five factors on the other four. All regressions will be conducted using the ordinary least squares (OLS) method.
Main Findings – Regarding asset pricing tests, all models fare worst in 12 value-weighted test portfolios formed from size and state capital. Specifically, the lethal portfolio for all tested models except CAPM contains large stocks of firms with low state capital (state owns more than 0% and less than 50% of charter capital). The average adjusted R2s of the CAPM, the three-factor model, and the five-factor model are respectively 45.6%, 69.8%, and 70.6%. Regarding the factor redundancy issue, High-Minus-Low (HML) is not a redundant factor in this empirical test. Instead, Robust-Minus-Weak (RMW) and Conservative-Minus-Aggressive (CMA) appear to be the potential candidates. In general, this thesis provides a cautious support for the superiority of the five-factor model over the CAPM and the three-factor model after assessing a combination of criteria. It is important to view the superiority of the five-factor model with caution since differences in performance between it and the three-factor model are hardly noticeable in many cases. Furthermore, despite its superior performance, the five-factor model cannot fully capture average returns in Vietnam’s stock market as it fails when test portfolios are formed from state capital, which is not explicitly targeted by design.