Does the Fama and French Five‐Factor Model Work Well in Japan?

• DOI: http://doi.org/10.1111/irfi.12126
• Date: 01 March 2018
• Author: Hitoshi Takehara,Keiichi Kubota
• Published date: 01 March 2018

Does the Fama and French Five-

Factor Model Work Well in Japan?*

KEIICHI KUBOTA

†

AND HITOSHI TAKEHARA

‡

†

Graduate School of Strategic Management, Chuo University, Tokyo, Japan and

‡

Graduate School of Business and Finance, Waseda University, Tokyo, Japan

ABSTRACT

In this study,we investigate whether the five-factor model by Fama and French

(2015) explains well the pricing structure of stocks with long-run data for

Japan. We conduct standard cross-section asset pricing tests and examine

the additional explanatory power of the new Fama and French factors;

robust-minus-weak profitability factor and conservative-minus-aggressive

investment factor. We find that robust-minus-weak and the conservative-

minus-aggressive factors are not statistically significant when we conduct

generalized method of moments (GMM) tests with the Hansen–Jagannathan

distance measure. Thus, we conclude thatthe original version of the Fama and

French five-factor model is not the best benchmark pricing model for Japanese

data during our sampling period from the year 1978to the year 2014.

I. INTRODUCTION

To date, the Fama and French three-factor model has been considered adequate

to explain the risk and return structure of stock data both for the USA (Fama

and French 1993) and Japan (Jagannathan et al. 1998, Kubota and Takehara

2010). However, Fama and French (2015) claim that their five-factor model is

superior to their original three-factor model (Fama and French 2015) for US firms

with new and longer data from July 1963 to December 2013.

This paper explores the plausibility of this five-factor model proposed by Fama

and French (2015) to determine whether this new model explains the long-run

data of Tokyo Stock Exchange firms from January 1978 to December 2014. We

duplicate the original definitions of the new two factors by Fama and French

(2015) in the context of financial statements disclosed by Japanese firms follow-

ing Japanese GAAP and explore the explanatory power of their five-factor model

when applied to Japanese data. We employ standard methodologies to choose

the best asset pricing model (Hansen and Jagannathan 1997, Gibbons et al.

1989, Cochrane 2005, Kubota and Takehara 2015).

* The authors acknowledge financial support from the Grant-in-Aid for Scientific Research ((A)

25245052) from the Ministry of Education, Culture, Sports, Science, and Technology of Japan. Hitoshi

Takehara acknowledges financial support from the Grant-in-Aid for Scientific Research ((C)

15 K03690). All remaining errors are our own.

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12126

International Review of Finance, 18:1, 2018: pp. 137–146

DOI:10.1111/irfi .12126

© 2017 International Review of Finance Ltd. 2017