The Empirical Explanatory Power of CAPM and the Fama and French Three-Five Factor Models in the Moroccan Stock Exchange

Abstract

This study empirically tests and compares the performances of three famous financial asset valuation models in the Moroccan stock exchange: CAPM, the Fama and French three-factor model, and the Fama and French five-factor model. Our sample considers monthly data covering the sample period of July 2002 to June 2020. The main findings reveal that the GRS test typically rejects each of the examined model. On the basis of our analysis, we find that the value effect is more pronounced than the size effect. However, profitability and investment effects are almost absent. Regarding the factor spanning tests, the results show that the value factor was not redundant. Beyond this, the size and investment factors are the redundant factors. In Morocco, the market factor is the most powerful factor, perhaps assisted by value and profitability factors. Although the CAPM performs poorly in capturing the variation in Moroccan returns, the market factor continues to play an important role, even after adding other factors. Overall, all the tested models were improved slightly, but leave part of the variation in Moroccan stock returns unexplained.