Decoding Risk Pricing in India: An Empirical Investigation of Factor Model Performance

Naina Naina; Kapil Gupta

Автор(и)

Naina Naina I.K. Gujral Punjab Technical University https://orcid.org/0000-0002-6454-3464
Kapil Gupta I.K. Gujral Punjab Technical University https://orcid.org/0000-0003-3817-1772

Ключові слова

Fama French Five Factor Model, profitability, investment, COVID-19

Анотація

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.

Посилання

Alam, M.H. (2025). An empirical evaluation of the Fama–French five-factor model in the Indian equity market: Evidence from NSE-listed stocks. Journal of Economics, Finance and Management Studies, 8(4), 2410–2418. https://doi.org/10.47191/jefms/v8-i4-37.

Balakrishnan, A., Maiti, M., & Panda, P. (2018). Test of five-factor asset pricing model in India. Vision, 22(2), 153–162. https://doi.org/10.1177/0972262918766133.

Black, F., Jensen, M.C., & Scholes, M. (1972). The capital asset pricing model: Some empirical tests. In M.C. Jensen (Ed.), Studies in the theory of capital markets (pp. 79–121). Praeger.

Dharani, M., Hassan, M.K., Huda, M., & Abedin, M.Z. (2023). Covid-19 pandemic and stock returns in India. Journal of Economics and Finance, 47(1), 251–266. https://doi.org/10.1007/s12197-022-09586-8.

Fama, E.F., & French, K.R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427–465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x.

Fama, E.F., & French, K.R. (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.

Fama, E.F., & French, K.R. (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.

Harshita, Singh, S., & Yadav, S.S. (2015). Indian stock market and the asset pricing models. Procedia Economics and Finance, 30, 294–304. https://doi.org/10.1016/S2212-5671(15)01297-6.

Horváth, D., & Wang, Y.L. (2021). The examination of Fama-French model during the COVID-19. Finance Research Letters, 41, 101848. https://doi.org/10.1016/j.frl.2020.101848.

Joshi, N.A. (2023). Impact Of Covid-19 On Performance on Indian Stock Indices: A Study for Nse Composite and Sectoral Indices. Copernican Journal of Finance & Accounting, 11(4), 125-146. https://doi.org/10.12775/CJFA.2022.022.

Karavias, Y., Narayan, P.K., & Westerlund, J. (2023). Structural breaks in interactive effects panels and the stock market reaction to COVID-19. Journal of Business & Economic Statistics, 41(3), 653-666. https://doi.org/10.1080/07350015.2022.2053690.

Khudoykulov, K. (2020). Asset-pricing models: A case of Indian capital market. Cogent Economics & Finance, 8(1). https://doi.org/10.1080/23322039.2020.1832732.

Kostin, K.B., Runge, P., & Mamedova, L.E. (2022). Validity of the Fama-French three-and five-factor models in crisis settings at the example of select energy-sector companies during the COVID-19 pandemic. Mathematics, 11(1), 49. https://doi.org/10.3390/math11010049.

Lintner, J. (1975). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(1), 13–37. https://doi.org/10.2307/1924119.

Naina, & Gupta, K. (2022). Sentimental herding in stock market: Evidence from India. Vision. https://doi.org/10.1177/09722629221133239.

O’Donnell, N., Shannon, D., Sheehan, B., & Ashraf, B.N. (2024). The Impact of COVID-19 on the fama-french five-factor model: unmasking industry dynamics. International Journal of Financial Studies, 12(4), 98. https://doi.org/10.3390/ijfs12040098.

Patil, S., & Jain, A. (2024). An empirical analysis of investor behavior: A post-COVID-19 examination of herd behavior in the National Stock Exchange of India (NSE). International Journal for Multidisciplinary Research, 6(2). https://doi.org/10.36948/ijfmr.2024.v06i02.18692.

Sehrawat, N., Kumar, A., Nigam, N.K., Singh, K., & Goyal, K. (2020). Test of capital market integration using Fama-French three-factor model: Empirical evidence from India. Investment Management & Financial Innovations, 17(2), 113–127. https://doi.org/10.21511/imfi.17(2).2020.10.

Shanbhag, S., & Quddus, K. (2025). Cross-sectional Predictability of Indian Stock Returns: A Factor Analytical Approach. Copernican Journal of Finance & Accounting, 14(2), 59–76. https://doi.org/10.12775/CJFA.2025.009.

Sharma, B., Srikanth, P., & Suresha, B. (2022). Size, value effects and the explanatory power of pricing models: Evidence from BSE listed Indian industries. Scientific Papers of the University of Pardubice. Series D, 30(2). https://doi.org/10.46585/sp30021490.

Sharpe, W.F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425–442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x.

Singh, K., Singh, A., & Prakash, P. (2023). Testing factor models in an emerging market: Evidence from India. International Journal of Managerial Finance, 19(1), 203–232. https://doi.org/10.1108/IJMF-05-2021-0245.