About a month ago we posted on the robustness of the Novy-Marx profitability factor, which is embedded in the Fama-French 5-factor. We also highlighted potential weaknesses in the 5-factor model across international markets.

Fama and French have responded with their own analysis on the 5-factor model in international markets:

International Tests of a Five-Factor Asset Pricing Model

Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. These patterns are strong for small stocks but weaker for big stocks. For Japan the relation between average returns and B/M is strong in all Size groups, but average returns show little relation to profitability or investment. Especially for big stocks, a five-factor model that adds profitability and investment factors to the three-factor model of Fama and French (1993) largely absorbs the patterns in average returns. As in Fama and French (2015a,b), the model’s prime problem is failure to capture fully the low average returns of small stocks whose returns behave like those of unprofitable firms that invest aggressively.


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