MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY BACHELOR THESIS Major Financial Banking Topic APPLICATION OF FAMA FRENCH FIVE FACTOR ASSET PRICING MODEL[.]
MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY BACHELOR THESIS Major: Financial - Banking Topic: APPLICATION OF FAMA FRENCH FIVE-FACTOR ASSET PRICING MODEL TO INDUSTRIAL COMPANIES IN VIETNAM STOCK MARKET Student’s name : Ph m Ho ng Ng c nh Student’s ID : 030630141945 Guiding teacher : MSc Nguy n Minh Nh t HCMC, December 2018 Tai ngay!!! Ban co the xoa dong chu nay!!! ABSTRACT The research has focused on one of the most important model for asset pricing which create variety of selections for investors who interested in ways to examine the return The author choose the Fama French five-factor model and conduct each factor to measure 100 listed industrial companies from January 2012 to December 2017 in Vietnam stock market To make sure the regression test are strong explainable, the author also test on Gibbons et al (1989) GRS-F test whether all the sorted portfolios can actually demonstrate positively by the sample The results show that MRP (market factor) factor plays an important role to all portfolios and SMB factors has positive significant than other threes, CMA factor may redundant in this test Fama French five-factor variables can explain the time-series average return of these companies and cause no pricing error Keywords: Fama French five-factor, asset pricing model; market capitalization; bookto-market equity; profitability; investment; industrial companies i DECLARATION OF AUTHENTICITY I honestly confirm that I am the sole author of the written these here enclosed and I have organized it in my own words With my signature, I confirm that I have documented all methods, data and processes sincerely I have mentioned all people who were significant facilitators of the work I declare that all statements and information contained here are true, correct and accurate to the best of my knowledge Ho Chi Minh City, December 24th, 2018 ii ACKNOWLEGEMENTS Firstly, I would like to express my gratitude and respect towards MSc Nguyen Minh Nhat for his patience, understanding and considerate support to provide me with useful recommendations and guidance in the progress of this study Secondly, I would like to thank my family for their support throughout my four years in Banking University And I would like to specially express gratefulness to family who supported to encourage before through my journey doing Bachelor program Finally, best regards to my lecturers, my friends and BUH for their sharing and support throughout my Bachelor program Ho Chi Minh City, December 24th, 2018 iii LIST OF ABBREVIATIONS HSX Ho Chi Minh Stock Exchange HNX Ha Noi Stock Exchange CAPM Capital Asset Pricing Model APT Arbitrage Pricing Theory MPT Modern Portfolio Theory SMB Small Minus Big MRP Market Risk Premium RMW Robust Minus Weak CMA Conservative Minus Aggressive FF5F Fama French factors OLS Ordinary Least Square VIF Variance Inflation Factor iv LIST OF TABLES Name of tables Page Table 1: Research framework 27 Table 2: Number of stocks in filtering stages 31 Table 3: Size and B/M bivariate sorting 34 Table 4: Size and Investment bivariate sorting 34 Table 5: Size and Profitability bivariate sorting 34 Table 6: Construction of size, BE/ME, profitability and 35 investment factors Table 7: Stationary test results regarding level values of 39 variables Table 8: Cross correlations matrix of independent 40 factors Table 9: Variance inflation factor test to factors 41 Table 10: FF5F Model regression results (January 43 2012‑ January 2018) Table 11: Statistics for model performance v 46 Table of Contents ABSTRACT i DECLARATION OF AUTHENTICITY ii ACKNOWLEGEMENTS iii LIST OF ABBREVIATIONS iv LIST OF TABLES v CHAPTER 1: INTRODUCTION viii 1.1 REASON TO RESEARCH viii 1.2 RESEARCH GOAL x 1.3 RESEARCH QUESTIONS x 1.4 RESEARCH SUBJECT AND RANGE x 1.5 METHODLOGY xi 1.6 RESEARCH CONTRIBUTION xi 1.7 RESEARCH OUTLINE xii CHAPTER 2: LITERATURE REVIEW AND PREVIOUS RESEARCHES xiv 2.1 Literature review xiv 2.1.1 Review about industrial companies xiv 2 Harry Markowitz‘s theory (MPT) xiv 2.1.3 CAPM (Capital Asset Pricing Model) xvi 2.1.4 APT (Arbitrage Pricing Theory) xviii 2.1.5 The Fama French three-factor model xx 2.1.6 Carhart four-factor model xxiii 2.1.7 The Fama French five-factor model xxiv 2.2 Previous researches xxvi 2.2.1 Previous reseaches from developed countries xxvi 2.2.2 Previous researches in developing countries xxviii 2.2.3 Previous research in Vietnam xxix 2.3 Research gap xxxi CHAPTER 3: DATA AND METHODOLOGY xxxiii 3.1 Data construction and processing method xxxiii 3.1.1 Data sources xxxiii vi 3.1.2 Data processing method xxxiv 3.1.3 Data analysis tool xxxv 3.2 Model xxxvi 3.2.1 Model definition xxxvi 3.2.1 Filtering the sample xxxvii 3.2.2 Measurement of variables xxxviii 3.3 Porfolios sorting xxxix 3.3 Factors calculating xli 3.4 Testing methods and Hypotheses of research xlii CHAPTER 4: EMPERICAL RESULTS xlvi 4.1 Descriptive statistics xlvi 4.2 Regression details xlix 4.3 Other relevant test li 4.4 Discussion about the result lii CHAPTER 5: CONCLUSION AND RECOMMENDATIONS liv 5.1 Conclusion liv 5.2 Recommendations lv 5.2.1 Recommendations for those who use the Fama French five-factor model lv 5.2.2 Recommendations for investors lvi 5.2.3 Recommendations for stock market in Vietnam lvii 5.3 Limitations of the study lviii 5.4 Rearches for futher research lviii REFERENCES lx APPENDIX lxiii vii CHAPTER 1: INTRODUCTION 1.1 REASON TO RESEARCH The stock market is the main key system and plays an important role in the national economy From the beginning years, to all investors (institutional or individual), their major concern is to get the highest possible return in a stock market but they didn‘t have many ways to measure which stocks actually bring more profits to them Choosing the right stock for your portfolio is similar to soccer betting The savvy number runner recognizes the team's skills, injury rates, team line-up into the odds, and hence will be able to informed guess that which team is going to win a specific game Understanding the underlying forces of these returns is the main choice to make good investment, the same with the professional bettor that the football game needs to be understood which factors may bring the outcome In the same way, a company's share price will be adjusted continuously to reflect the market value of the stock, resulting in higher profit margins and detailed analysis of price volatility, risk, past performance and unexpected future Therefore, determining returns of a portfolio is necessary process that investors need to know before investing Over the past hundred years, researchers have come up with many pricing models Accordingly, studies began in the mid 1900s and were widely used in the global economy, typically are CAPM (Capital Asset Pricing Model) from Sharpe (1964), Lintner (1965) and Mossin (1966) In this model, only the market risk factor is use to measure the beta of stocks‘ expected return Although CAPM is widely used and tested in many countries, there is considerable denying applicable evidence to this theory According to Basu (1977), he examined and verified the efficiency and efficacy of the model and finds that CAPM fails completely in the Indian context Moreover, Rolf W Banz (1981) used the CAPM on NYSE common stocks and demonstrated CAPM is misspecified Since the CAPM model can only measure market risk factor in the market, APT model can be a multi-factor Using APT, arbitrageurs hope to take advantage of any deviations from fair market value However, this is not a risk-free operation in the classic sense of arbitrage Thus, Eugene Fama and Kenneth French conducted empirical research on the relationship viii between profits and stocks, firm‘s size, B/M ratios and beta Finally, they released the Fama French three-factor model Even if it was on a theoretical basis, the three-factor model had attracted a large number of stock markets in the 1980s and in the future days Particularly, Maroney and Protopapadakis (2002) tested the Fama-French threefactor model on the stock markets in Australia, Canada, Germany, France, Japan, the United Kingdom and the United States The influence of size and value factor is found in all markets In 1997, Mark Carhart had combined the three-factor model to create another new four-factor model, including the momentum factor for pricing asset of the stock monthly Carhart‘s model is used as a model for managing and evaluating mutual funds However, some researches have been found that the complementarity factor seems to show a strong relationship with average returns Novy-Marx(2013) shows that high-profit companies generate significantly more revenue than non-profit companies Aharoni, Grundy and Zeng (2013) said that there is a statistically significant relationship that exists between investment and profit margins Following these findings, Fama and French extended the model and finally examined The fivefactor model was published in the Journal of Financial Economics in April 2015 Their goal is to identify two new factors called Profit (RMW-Robust-minus-Weak) and Investment (CMA-Conservative-minus-Aggressive Investment) This model has been studied in 23 developed markets in four regions: North America occupies the highest rate of 40% (USA and Canada), Japan, Asia-Pacific (Australia, New Zealand, Hong Kong and Singapore) and Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, UK, ) The Fama French five-factor model is receiving massive attention from developed countries in general and the Viet Nam stock market in particular and most researches only focus on the three-factor and a few researchers apply five-factor but clearly the factors is still a big question To the best of the author‘s knowledge, this subject ― pplication of Fama French factors to industrial companies in Viet Nam stock market‖, the author expect the article will evaluate the integration of the model into the Vietnam stock market and support all the investors optimizing their value in the stock market ix 20 Fama, Eugene F.; MacBeth, James D (1973), ―Risk, Return, and Equilibrium: Empirical Tests‖ 21 JH Cochrane (2011), ―Presidential address: Discount rates‖, The Journal of Finance 22 Eugene F.Fama, Kenneth R French (2014), ― five-fator asset pricing model‖, Journal of Finance 23 Souad jili (2002), ―Capital Asset Pricing Model and three factor model of Fama and French revisited in the case of France‖ 24 John M Griffin (2002), ― re the Fama and French Factors Global or CountrySpecific?‖ 25 Keiichi Kubota and Hitoshi Takehara (2017), ―Does the Fama and French Five‐ Factor Model work well in Japan?‖ 26 Grace Xing Hu, Can Chen,Yuan Shao, Jiang Wang (2018); ―Fama–French in China: Size and Value factors in Chinese Stock Returns‖ 27 Harshita, S Singh, Surendra S Yadav (2015), ―Indian Stock Market and the sset Pricing Models‖ 28 Songül Kakilli caravci, Yunus Karaomer (2017), ―Fama-French five factor model: Evidence from Turkey‖ 29 Ferson, W E., and C R Harvey (1999), ―Conditioning variables and the crosssection of stock returns,‖ Journal of Finance 30 Kent Daniel, Sheridan Titman, and K C John Wei (2001); ―Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics?‖, Journal of Finance 31 Heston, S L , Rouwenhorst, K G , & Wessels, R E (1999), ―The Role of Beta and Size in the Cross-Section of European Stock Returns‖, European Financial Management 32 Gibbons, M.R., Ross, S.A., Shanken J (1989); ―A test of the efficiency of a given portfolio‖, Econometrica lxii APPENDIX APPENDIX A: 100 industrial companies chosen for Regression Trading code ALT APC BBS BCC BCE BMP BPC BTS BTT CAN CAP CCI CDC CII CJC CPC CTB CTD DAG DBC DID DIG DLG DNC DPC DQC DVP GMD HAD HBC HCC HDG HHC Database HNX HSX HNX HNX HSX HSX HNX HNX HSX HNX HNX HSX HSX HSX HNX HNX HNX HSX HSX HNX HNX HSX HSX HNX HNX HSX HSX HSX HNX HSX HNX HSX HNX lxiii HJS HOM HTI HTV HVT IJC INN ITA L10 L35 L61 L62 LCG LGC LGL LM8 MAC MHC NAG NBP NET NTP PET PMS RAL REE SAF SAM SC5 SCJ SDG SDN SEB SFI SFN SGC SHI SIC SMA HNX HNX HSX HSX HNX HSX HNX HSX HSX HNX HNX HNX HSX HSX HSX HSX HNX HSX HNX HNX HNX HNX HSX HNX HSX HSX HNX HSX HSX HNX HNX HNX HNX HSX HNX HNX HSX HNX HSX lxiv SRF ST8 STG TCL TKU TLG TMS TNA TNG TTC TYA THB UDC VBC VCS VDL VGS VHL VIP VIT VNE VNL VNG VRC VSC VSI VTO VTS HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX HSX lxv APPENDIX B: Multicollinearity test of making OLS Regression test with 18 sorted portfolios Regression of SMB- SN with Fama French five-factor Regression of SMB- BH with Fama French five-factor lxvi Regression of SMB- BL with Fama French five-factor Regression of SMB- BN with Fama French five-factor lxvii Regression of SMB- SH with Fama French five-factor Regression of SMB- SL with Fama French five-factor lxviii Regression of CMA- BA with Fama French five-factor Regression of CMA- BC with Fama French five-factor lxix Regression of CMA-BN with Fama French five-factor Regression of CMA-SA with Fama French five-factor lxx Regression of CMA-SC with Fama French five-factor Regression of CMA-SN with Fama French five-factor lxxi Regression of RMW-BN with Fama French five-factor Regression of RMW-BR with Fama French five-factor lxxii Regression of RMW-BW with Fama French five-factor Regression of RMW-SN with Fama French five-factor lxxiii Regression of RMW- BR with Fama French five-factor Regression of RMW- SW with Fama French five-factor lxxiv APPENDIX C: Correlations Test APPENDIX D: VIF Test lxxv APPENDIX E: Heteroskedasticity White Test APPENDIX F: GRS-F Test lxxvi