An Empirical Analysis of Asset Pricing Models

This paper presents a comparative analysis of three asset pricing models, namely, the Capital Asset Pricing Model (CAPM), the Fama-French Three Factor Model (FF3), and the Fama-French Five Factor Model (FF5), using six market portfolios generated from NYSE, AMEX, and NASDAQ stocks. The research aims to investigate which model has the best performance in terms of goodness of fit using ANOVA testing. Contrary to the traditional assumption that FF5 outperforms the other two, the study reveals that FF3 has the best performance in terms of the smallest RRS in ANOVA testing. The paper also discusses the effect of adding more regressors to CAPM and transitioning to FF5. The results confirm that FF models have general improvements from CAPM in accuracy and completeness, but there is a trivial increase in performance by adding the additional investment factor and profitability factor to FF3. The success of various asset pricing models is better understood due to this research, which can help with investing choices and portfolio management tactics. The findings have implications for practitioners and policymakers in the financial industry.