Analysis of the Modern Financial Regression Model: CAPM and Fama-French

Yucheng Lin

2024

Abstract

Contemporarily, financing pricing models are widely adopted in assets evaluations. This study will discuss the development and empirical testing of the CAPM, Fama-French Three-Factor Model (FF3), and the Five-Factor Model (FF5) in the context of modern asset pricing. The FF3 model improved upon the traditional CAPM by introducing size and value factors to better capture variations in stock returns. However, its inability to account for differences in profitability and investment behaviours led to the creation of the FF5 model, which adds profitability and investment factors. Empirical evidence suggests that while the FF5 model generally outperforms the FF3 model in explaining stock returns, particularly in the U.S. market, its performance is less consistent in other markets, such as China and Japan, indicating its limitations in diverse economic and regulatory environments. The review highlights the FF5 model's potential factor redundancy, inconsistent results across markets, and limited ability to capture certain stock behaviours as areas requiring further development. Future research directions include integrating artificial intelligence and behavioural factors to enhance the model's predictive power and applicability. This research concludes that while the FF5 model represents a significant advancement in asset pricing.

Paper Citation

in Harvard Style

Lin Y. (2024). Analysis of the Modern Financial Regression Model: CAPM and Fama-French. In Proceedings of the 1st International Conference on E-commerce and Artificial Intelligence - Volume 1: ECAI; ISBN 978-989-758-726-9, SciTePress, pages 314-318. DOI: 10.5220/0013224200004568

in Bibtex Style

@conference{ecai24,
author={Yucheng Lin},
title={Analysis of the Modern Financial Regression Model: CAPM and Fama-French},
booktitle={Proceedings of the 1st International Conference on E-commerce and Artificial Intelligence - Volume 1: ECAI},
year={2024},
pages={314-318},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0013224200004568},
isbn={978-989-758-726-9},
}

in EndNote Style

TY - CONF

JO - Proceedings of the 1st International Conference on E-commerce and Artificial Intelligence - Volume 1: ECAI
TI - Analysis of the Modern Financial Regression Model: CAPM and Fama-French
SN - 978-989-758-726-9
AU - Lin Y.
PY - 2024
SP - 314
EP - 318
DO - 10.5220/0013224200004568
PB - SciTePress