TITLE:
A New Fama-French 5-Factor Model Based on SSAEPD Error and GARCH-Type Volatility
AUTHORS:
Wentao Zhou, Liuling Li
KEYWORDS:
Fama-French 5-Factor Model (FF5), Standardized Standard Asymmetric Exponential Power Distribution (SSAEPD), GARCH, Asset Pricing
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.5,
November
16,
2016
ABSTRACT: In this paper, we extend the 5-factor model in Fama and French (2015) with the non-Normal errors distribution of SSAEPD (Standardized Standard Asymmetric Exponential Power Distribution) in Zhu and Zinde-Walsh (2009) and the GARCH-type volatility. The focus is on finding out whether our new model can outperform the original Fama-French 5-factor model. We use Fama-French 25 value-weighted portfolios to conduct our research. The MLE is used to estimate the parameters. The LR test and KS test are used for model diagnostics. Models are compared by AIC. Empirical results show that with GARCH-type volatilities and non-normal errors, the Fama-French 5 factors are still alive. Our new model can successfully capture the skewness, fat-tailness and asymmetric kurtosis in the data and has better in-sample fit than the 5-factors model in Fama and French (2015). Our study provides an update to existing asset pricing literature and reference for investors.