Fama–French Five-Factor Modeling: New Evidence from a Nonparametric Method
-
Zihao Hou
and
Dimitrios Stafylas
Abstract
This study constructs a Fama–French five-factor model that considers the time-varying properties of the parameters and introduces a nonparametric method that estimates the factor loadings. We approach the topic from a micro perspective using high-frequency data to construct factors and models to evaluate the sensitivity of each factor on abnormal returns. The results show that the conditional alphas of portfolios are optimised, and the nonparametric model outperforms the traditional models. Our findings lead investors to consider the impact of parameter time variation when using multi-factor stock selection models to construct asset portfolios.
References
Aït-Sahalia, Y., I. Kalnina, and D. Xiu. 2020. “High-frequency Factor Models and Regressions.” Journal of Econometrics 216 (1): 86–105. https://doi.org/10.1016/j.jeconom.2020.01.007.Search in Google Scholar
Ang, A., and D. Kristensen. 2012. “Testing Conditional Factor Models.” Journal of Financial Economics 106 (1): 132–56. https://doi.org/10.1016/j.jfineco.2012.04.008.Search in Google Scholar
Arkol, O., and A. Azimli. 2024. “Pricing the Common Stocks in Emerging Markets: The Role of Economic Policy Uncertainty.” Modern Finance 2 (1): 31–50. https://doi.org/10.61351/mf.v2i1.93.Search in Google Scholar
Asness, C. S., A. Frazzini, and L. H. Pedersen. 2019. “Quality Minus Junk.” Review of Accounting Studies 24 (1): 34–112. https://doi.org/10.1007/s11142-018-9470-2.Search in Google Scholar
Bandi, F. M., and P. C. Phillips. 2003. “Fully Nonparametric Estimation of Scalar Diffusion Models.” Econometrica 71 (1): 241–83. https://doi.org/10.1111/1468-0262.00395.Search in Google Scholar
Bandi, F. M., and J. R. Russell. 2006. “Separating Microstructure Noise from Volatility.” Journal of Financial Economics 79 (3): 655–92. https://doi.org/10.1016/j.jfineco.2005.01.005.Search in Google Scholar
Bandi, F. M., and J. R. Russell. 2008. “Microstructure Noise, Realized Variance, and Optimal Sampling.” The Review of Economic Studies 75 (2): 339–69. https://doi.org/10.1111/j.1467-937X.2008.00474.x.Search in Google Scholar
Bollerslev, T., and H. Zhou. 2006. “Volatility Puzzles: A Simple Framework for Gauging Return-Volatility Regressions.” Journal of Econometrics 131 (1–2): 123–50.10.1016/j.jeconom.2005.01.006Search in Google Scholar
Chiah, M., D. Chai, A. Zhong, and S. Li. 2016. “A Better Model? An Empirical Investigation of the Fama–French Five‐factor Model in Australia.” International Review of Finance 16 (4): 595–638. https://doi.org/10.1111/irfi.12099.Search in Google Scholar
Connor, G., M. Hagmann, and O. Linton. 2012. “Efficient Semiparametric Estimation of the Fama–French Model and Extensions.” Econometrica 80 (2): 713–54. https://doi.org/10.3982/ECTA7432.Search in Google Scholar
Dybvig, P. H., and S. A. Ross. 1985. “Differential Information and Performance Measurement Using a Security Market Line.” The Journal of Finance 40 (2): 383–99. https://doi.org/10.1111/j.1540-6261.1985.tb04963.x.Search in Google Scholar
Fama, E. F., and K. R. French. 1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33 (1): 3–56. https://doi.org/10.1016/0304-405X(93)90023-5.Search in Google Scholar
Fama, E. F., and K. R. French. 1998. “Taxes, Financing Decisions, and Firm Value.” The Journal of Finance 53 (3): 819–43. https://doi.org/10.1111/0022-1082.00036.Search in Google Scholar
Fama, E. F., and K. R. French. 2015. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics 116 (1): 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010.Search in Google Scholar
Fama, E. F., and K. R. French. 2017. “International Tests of a Five-Factor Asset Pricing Model.” Journal of Financial Economics 123 (3): 441–63. https://doi.org/10.1016/j.jfineco.2016.11.004.Search in Google Scholar
Fan, J., Y. Li, and K. Yu. 2012. “Vast Volatility Matrix Estimation Using High-Frequency Data for Portfolio Selection.” Journal of the American Statistical Association 107 (497): 412–28. https://doi.org/10.1080/01621459.2012.656041.Search in Google Scholar PubMed PubMed Central
Ferson, W. E., and M. Qian. 2004. Conditional Performance Evaluation, Revisited, 1–85. Charlottesville: Research Foundation of CFA Institute.Search in Google Scholar
Foye, J. 2018. “A Comprehensive Test of the Fama-French Five-Factor Model in Emerging Markets.” Emerging Markets Review 37: 199–222. https://doi.org/10.1016/j.ememar.2018.09.002.Search in Google Scholar
Gallagher, M. J. 2015. “A Nonparametric Approach to Multifactor Modeling.” Doctoral diss., ProQuest diss. & Theses Global, Fordham University.Search in Google Scholar
Gibbons, M. R., S. A. Ross, and J. Shanken. 1989. “A Test of the Efficiency of a Given Portfolio.” Econometrica: Journal of the Econometric Society: 1121–52. https://doi.org/10.2307/1913625.Search in Google Scholar
Holý, V., and P. Tomanová. 2022. “Modeling Price Clustering in High-Frequency Prices.” Quantitative Finance 22 (9): 1649–63. https://doi.org/10.1080/14697688.2022.2050285.Search in Google Scholar
Hui, X., B. Sun, I. SenGupta, Y. Zhou, and H. Jiang. 2022. “Stochastic Volatility Modeling of High-Frequency CSI 300 Index and Dynamic Jump Prediction Driven by Machine Learning.” arXiv preprint arXiv:2204.02891. https://doi.org/10.48550/arXiv.2204.02891.Search in Google Scholar
Jagannathan, R., and Z. Wang. 1996. “The Conditional CAPM and the Cross‐section of Expected Returns.” The Journal of Finance 51 (1): 3–53. https://doi.org/10.1111/j.1540-6261.1996.tb05201.x.Search in Google Scholar
Jensen, M. C. 1968. “The Performance of Mutual Funds in the Period 1945-1964.” The Journal of Finance 23 (2): 389–416. https://doi.org/10.2307/2325404.Search in Google Scholar
Keim, D. B., and R. F. Stambaugh. 1986. “Predicting Returns in the Stock and Bond Markets.” Journal of Financial Economics 17 (2): 357–90. https://doi.org/10.1016/0304-405X(86)90070-X.Search in Google Scholar
Kelly, B. T., S. Pruitt, and Y. Su. 2019. “Characteristics Are Covariances: A Unified Model of Risk and Return.” Journal of Financial Economics 134 (3): 501–24. https://doi.org/10.1016/j.jfineco.2019.05.001.Search in Google Scholar
Kristensen, D. 2010. “Nonparametric Filtering of the Realized Spot Volatility: A Kernel-Based Approach.” Econometric Theory 26 (1): 60–93. https://doi.org/10.1017/S0266466609090616.Search in Google Scholar
Lewellen, J., and S. Nagel. 2006. “The Conditional CAPM Does Not Explain Asset-Pricing Anomalies.” Journal of Financial Economics 82 (2): 289–314. https://doi.org/10.1016/j.jfineco.2005.05.012.Search in Google Scholar
Li, Y., and L. Yang. 2011. “Testing Conditional Factor Models: A Nonparametric Approach.” Journal of Empirical Finance 18 (5): 972–92. https://doi.org/10.1016/j.jempfin.2011.07.004.Search in Google Scholar
Mykland, P. A., and L. Zhang. 2006. “ANOVA for Diffusions and Ito Processes.” Annals of Statistics 34 (4): 1931–63, https://doi.org/10.1214/009053606000000452.Search in Google Scholar
Racicot, F. E., W. F. Rentz, and R. Théoret. 2023. “Is Illiquidity Priced in an International Factor Pricing Model? A Dynamic Panel Data Application with Robust IV.” International Journal of Finance & Economics 30: 282–314. https://doi.org/10.1002/ijfe.2919.Search in Google Scholar
Sha, Y., and R. Gao. 2019. “Which Is the Best: A Comparison of Asset Pricing Factor Models in the Chinese Mutual Fund Industry.” Economic Modelling 83: 8–16. https://doi.org/10.1016/j.econmod.2019.09.016.Search in Google Scholar
Silverman, B. W. 1986. Density Estimation for Statistics and Data Analysis. London: Chapman & Hall.Search in Google Scholar
Supplementary Material
This article contains supplementary material (https://doi.org/10.1515/snde-2024-0046).
© 2025 Walter de Gruyter GmbH, Berlin/Boston
