A Test of Fama-French Five-Factor Model in Quantitative Easing

Abstract

In the evolving context of financial markets, the global financial crisis and subsequent quantitative easing policies have reignited scrutiny of the effectiveness of asset pricing models. This study employs the Fama-French methodology to conduct a detailed analysis of data from July 1963 to January 2024, a period encompassing significant economic shifts, to evaluate the robustness of the Fama-French three-factor and five-factor models under different market conditions. By examining five key factors—market excess returns, size premium, value premium, profitability, and investment style—across various time frames, the research seeks to identify the efficacy of these models in explaining stock returns during quantitative easing policies. The findings reveal variations in the explanatory power of these models across different market cycles. This study underscores the importance of incorporating additional risk factors to accurately capture the complexities of financial markets, especially during pivotal economic policy periods. However, it also recognizes the limitations imposed by the exclusion of data, potentially overlooking specific market dynamics crucial for understanding the impacts of the financial crisis and quantitative easing. By expanding the understanding of classic asset pricing models within the contemporary financial markets and shedding light on market dynamics under quantitative easing, this research not only provides valuable insights but also sets a direction for future exploration in financial market analysis and asset pricing model development.