A comparative Analysis of Performance of Three-Factor and Five - Factor Fama and French Model to Estimate the Expected Rate of Return in Tehran Stock Exchange

Abstract

Accurately predict of stock returns is a key factor in investment decisions. The aim of this study is the test of five-factor Fama and French model and to comparison the performance of three-factor and five-factor model of Fama and French (2015) to estimate the expected return. This research is a correlation-descriptive research and its hypothesis is tested based on data collected from 40 companies listed on Tehran Stock Exchange in 2009 to 2014 years. Research hypothesis are tested by correlations synchronicity assessing in two phases of Alpha time series test to calculating intercept by GRS statistic and cross-sectional Fama-Macbeth (1973) test in pricing coefficient. The results show that five-factor model of Fama and French, with these explanatory variables: size, value, profitability and investment pattern, explains excess stock returns better than Fama and French three-factor model. Based on the results, in three-factor model value is the only factor that is significant, while the five-factor model price these two factors: value and investment.

Keywords

• five factor asset pricing model of fama-french
• capital asset pricing model test
• investment pattern
• profitability