Test of Five-factor Asset Pricing Model in India

Abstract

In this article, we examine whether stock returns are related with important firm characteristics and fundamentals such as size, value, profitability and investment. We also evaluate whether the existing asset pricing models of Fama–French three-factor (FFTF) model and Fama–French five-factor model can capture the average returns on portfolios constructed based on the above characteristics and fundamentals. We find from the results that average return pattern clearly shows that Indian stock market is strongly influenced by the factors mentioned above. Asset pricing results also shed light that FFTF model clings on to its efficiency at capturing the average returns on portfolios, while Fama–French five-factor model does a plausible job.