An Empirical Evaluation of the Fama-French Five-Factor Model in the Indian Equity Market: Evidence from NSE-Listed Stocks
Md Hasnat Alam
Department of Business Administration, Aligarh Muslim University, Aligarh, India
https://doi.org/10.47191/jefms/v8-i4-37ABSTRACT:
This study evaluates the performance of Fama-French three- and five-factor models, emphasizing profitability (RMW) and investment (INV) factors in explaining stock returns. By examining these frameworks, this study seeks to enhance the understanding of market behavior and return determinants. The analysis uses NSE 500 constituents from October 1995 to September 2022, employing time-series regression to assess model efficacy through statistical measures, including intercept terms (alpha) and goodness-of-fit metrics (adjusted R²). The results show the Five-Factor Model's superior explanatory power compared to the CAPM and Three-Factor specification, validating the value of profitability and investment factors in asset pricing. This study reveals the limitations of single-factor approaches while highlighting the advantages of multifactor frameworks for return prediction, portfolio optimization, and risk assessment. The 27-year dataset provides more robust insights than those of previous studies with restricted parameters, enabling the identification of market patterns across varying economic conditions. These findings advance the empirical asset pricing literature through a comparative analysis of competing models in the Indian equity context, with implications for investment strategies and financial decision-making.
KEYWORDS:
Asset pricing, Factor investing, multi-factor models, Risk premium, Profitability
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