Decoding Risk Pricing in India: An Empirical Investigation of Factor Model Performance
Klíčová slova
Fama French Five Factor Model, profitability, investment, COVID-19Abstrakt
The current study focuses on explaining the average excess returns on portfolios constructed using fundamental factors. This is a maiden attempt to elucidate the efficacy of Fama & French (2015) five factor model for the sample period March 31, 2016 to March 31, 2023, thus, including the COVID – 19 crisis (2020 – 2023) period also. The study endeavours to examine whether the efficacy of this model still holds true during pandemic. The results suggest that Fama & French (2015) five factor model has a better explanatory power than Fama & French (1993) three factor model in India as 75% intercepts of FF5F are statistically insignificant in contrast to 50% of FF3F. However, a novel observation is found when profitability factor (in addition to investment factor) becomes redundant. Consequently, when comparative analysis is done between stable and pandemic period, the market and size factor lose their relevance during the pandemic period. The results provide valuable insights for the investors, policymakers and portfolio managers, which shall aid them in understanding stock determinants effectively.
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