Testing multifactor asset pricing models in the stock market

Abstract

lthough the superiority of Fama-French (FF) five-factor model in capturing the United States (US) equity returns, this model performs poorly in other stock markets (Fama & French, 2017). Using the monthly data of nearly 600 Vietnamese published firms from 2008 to 2022, the primary purpose of this paper is to analyze and examine the performance of four famous multifactor asset pricing models: the capital asset pricing model (CAPM), the Carhart four factor model, and the FF three-factor and five-factor models. We document the preference for the Carhart four-factor model over other models in producing a precise description to Vietnamese stock returns. The CAPM cannot give a reasonable explanation to the variation of Vietnamese stock returns, implying that market risk only accounts for a small proportion of the risk of holding Vietnamese stocks. Furthermore, adding the profitability and investment factors does not improve the explanatory power of asset pricing models in Vietnam, inconsistent with the result reported in the US stock market (Fama & French, 2015, 2020).