Application of fama french factors to industrial corporations in vietnam stock market bachelor thesis of banking and finance

Keywords: Fama French five-factor, asset pricing model; market capitalization; to-market equity; profitability; investment; trading businesses... 1.2 Research objective The aim of this t

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 FINANCIAL

MODEL TO INDUSTRIAL CORPORATIONS IN

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 FINANCIAL MODEL

TO INDUSTRIAL CORPORATIONS IN VIETNAM

Student’s name : Dương Đại Phát

Guiding teacher : Msc Nguy n Minh Nh t

HCMC, February 2021

Keywords: Fama French five-factor, asset pricing model; market capitalization; to-market equity; profitability; investment; trading businesses

book-DECLARATION OF AUTHENTICITY

I affirm that I wrote this and have provided credit for each quote I certify that I havecompleted all processes and methods faithfully and honestly I mentioned to all of thepeople who contributed significantly to this effort

I would like to report that all representations and material found here are valid, rightand authentic

Ho Chi Minh City, February 2021

First of all, I'd like to express my appreciation to Mr Nguyen Minh Nhat for providing

me with helpful advice and motivation during this project

Secondly, I would like to thank my family and friends who have been there every step

of the way during my four years in Banking University

Lastly, best wishes to my lecturers and BUH for their knowledge, encouragement, and understanding

COMMENTS FROM GUILDING TEACHER

HCMC, 2021

Signature of guiding teacher

Table of Contents

CHAPTER 1: INTRODUCTION 8

1.1 Reason to research 8

1.2 Research objective 9

1.3 Research questions 9

1.4 Research subject and range 10

1.5 Methodlogy 10

1.6 Research contribution 11

1.7 Research outline 11

CHAPTER 2: LITERATURE REVIEW AND PREVIOUS RESEARCHES 13

2.1 Literature review 13

2.1.1 Arbitrage Pricing Theory (APT) 13

2.1.2 The Fama French three-factor model 14

2.1.3 Carhart four factor model 16

2.1.4 The Fama French five factor model 17

2.2 Previous researches 19

2.2.2 Previous researches from developed countries 19

2.2.3 Previous researches in developing countries 21

2.2.4 Previous research in Vietnam 23

CHAPTER 3: DATA AND METHODOLOGY 26

3.1 Data construction and processing method 26

3.2 Model 27

3.3 Factors calculating 31

3.4 Testing methods and Hypotheses of research 32

CHAPTER 4: EMPERICAL RESULTS 35

4.1 Descriptive statistics 35

4.2 Regression details 37

4.3 Relevant test 39

4.4 About the result 40

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 42

5.1 Conclusion 42

5.2 Recommendations 43

REFERENCES 47

to be understood which influences can carry the outcome During over one hundredyears of study, researchers have identified many pricing models Studies started in themid-1960s and went on as part of the global economy, usually including the CapitalAsset Pricing Model (CAPM) from Sharpe (1964), Lintner (1965) and Mossin (1968).(1966) In this model, only beta (market risk factor) is used to calculate the anticipatedreturn of the stock There is a considerable denial regarding the reliability of CAPMtheory According to Basu (1977), he noticed that all the above alternativeinterpretations fail absolutely in the Indian sense As a result, Rolf W Banz (1981)found that the CAPM was misspecified and that others have accepted that thecalculation is inadequate for NYSE stocks After that, Fama and French conductedobservational research that investigated the relationship between income and stocks,company scale, B/M ratios and beta Finally, the French three-factor model wasreleased This model was later replaced the CAPM model after 30 years of use Thethree-factor model was, by all accounts, a popular model for forecasting businessdemand in the 1980s and in the future The Fama-French three-factor model waschecked for its usage in the global capital markets in Australia, Canada, Germany,France, Japan, the United Kingdom and the United States Price and scale play a part

in both sectors In 1997, Mark Carhart substituted the three-factor model with a revisedfour-factor model that used a momentum factor to measure the monthly valuation of anasset The Carhart model is also used as an example to evaluate and administer mutualfunds Analysis has shown that the complementarity effect can affect returns for theplurality, but not everyone Novy-Marx (2013) concludes that businesses withsignificantly higher earnings produce significantly more sales Aharoni, Grundy, andZeng (2013) find that a rise in spending and a decline in profit margins were associatedwith an increase in profit From these results, Fama and French developed thatdiversification enhances return A five-factor model for understanding financialdecision-making was released in the Journal of Financial Economics in early 2015.Their aim is to remove gains from the equation and

prioritize investments (CMA-Conservative Minus Aggressive Investment) This modelhas been tested in 23 developing markets, and reported to be successful in four regions– North America, Japan, the Asia Pacific and Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, UK, ).

The Fama five-factor model is attracting massive interest from investors in general andfrom the equity market in particular However, most researchers have not yet explicitlysolved the problem In the analysis of Vo Hong Duc and Mai Duy Tan (2014), theygraded the portfolio by running several regression models and splitting the portfolioaccording to their findings However, implementing the same portfolios will lead tosurprise, such as various sets of variables that might be associated and bound to eachother In comparison, modelling portfolios on just 14 individuals is not necessary toachieve reputation

However, to the best of the author's understanding, "Application of Fama Frenchfactors to industrial companies in Viet Nam stock market", I think the article wouldanalyze the introduction of the concept into the Vietnam stock market and helpinvestors maximizing their value in the stock market

1.2 Research objective

The aim of this thesis was to:

Firstly, analyze the influence of the five-factor model, including industry, scale,valuation, benefit, and investment factors has on listed industrial stocks returns in theVietnam stock market

Secondly, describe the relevant valuation model and the fluctuation of the Vietnamese

capital market returns in a simple and detailed manner

Finally, offer several ideas on how owners, regulators, and other stockholders mayenhance the continuing management of the fund

1.3 Research questions

To accomplish the above study's purpose, these are the questions it seeks to address:

- Does a company's book-to-market ratio, profitability, scale, market premium,and investment risk impact the portfolio's returns? Is there a favorable ornegative connection between the stock results and the external factors?

- The Fama French five-factor model is sufficient method for describing the shifts in returns in the equity market in Viet Nam?

- Why investors make use of analysis to raise equity capital and reduce

investment risks?

1.4 Research subject and range

The study emphasis is on utilizing the Fama French Five-Factor Pricing Model for mentioned manufacturing firms on the HNX and HOSE exchanges

- Space: This analysis used closed market details of the reported marketcapitalization of industrial firms on HOSE and HNX Companies outside of thebanking industry, including insurance companies, insurers and brokeragecompanies, are not listed in these rankings

1.5 Methodlogy

The aim of the analysis was to evaluate the Fama French Five Factor Model in

Vietnamese industrial firms, a quantitative methodology was implemented:

- Follow the Ordinary Least Square (OLS) procedure to quantify the Betas, and analyze the association between variables and portfolios

- Using Gibbons, Ross, and Shanken (1989) GRS model to approximate the fundamental influence of the model on the list of firms

- Excel Office is used to synthesize data and equations accompanied by the usage

of Stata version 13 to execute regression and other related hypothesis testingprocedures

profitability factor and (Conservative minus Aggressive) the investment factor

The coefficients is the asset’s sensibility, the intercept and the error term of

asset i at time t.

1.6 Research contribution

The thesis provides many unique contributions:

The purpose of the study is to validate the usability of Fama French five-factorpricing models Thus, the study can clarify more precisely the factors of the FamaFrench model for investors and researchers who are studying and discovering the ways

to predict future income rates by limiting the immediate risks As a consequence, theconcept can be extended directly to the Vietnam capital exchange

Experimentally, by assessing the feasibility of the templates, analyzing the testfindings, and presenting any hints to investors and individuals when choosing andhandling the portfolio

1.7 Research outline

Chapter 1: Introduction

This chapter introduces the motives for conducting this project, the research aims, theresearch subject, the research range and the scope of work

Chapter 2: Literature review

This chapter presents the theoretical background behind the current study, andprevious research into a similar subject

Chapter 3: Data and methodology

This chapter outlines the study architecture and the specifics of the experiment Theauthor defines the dependent and influencing variables, gives guidance forconstructing a portfolio, and describes regression analysis and the steps involved inusing it

Chapter 4: Empirical results

This chapter includes a regression study to demonstrate the effects of the key modeldiscussed in Chapter 3 This section includes data on all variables, includingassociation, graph, and compare and contrast of models Any segment concludes with

a description of the findings and a reference to previous research

Chapter 5: Conclusions and recommendations

Overall, I noticed that this study was useful in many respects The author offers adeeper interpretation of this analysis and gives suggestions for company owners, bankofficers and public policy leaders The shortcomings of the analysis are stated andrecommendations for future studies are made

CHAPTER 2: LITERATURE REVIEW AND PREVIOUS

RESEARCHES

2.1 Literature review

2.1.1 Arbitrage Pricing Theory (APT)

In 1976, Ross did not merely expand an established theory but to establish a new idea.This theory, regarded as the Arbitrage Pricing Theory (APT), became extremelypopular The derivative is used in exchanging stocks and goods from one market toanother, and a currency between various markets, in order to arbitrage The APT is ageneral principle of asset valuation whereby the projected return on a financial assetmay be uniquely modeled as a linear feature of some macro-economic variables ortheoretical market indices

However, it is not a model, but rather a simplified hypothesis of financial returns TheExpected Return of a stock i is a function that represents both systemic and non-systematic risk factors

(1)Where:

is the expected return on asset i

the riske-free interest rate in government bonds

the asset beta sensitivity of different risk factors

the risk premium of the factor

k= (1,2, n) the number of the factor

i the variable of stock

We accepted that non-systematic threats can be almost reduced by diversification ofthe portfolio as long as the compensatory considerations can only be attributed tosystematic risks Systematic risk factors come under the concept of the APThypothesis, including:

- Inflation

- Economic cycle

- Economic prosperity, GNP

- Evaluates a difference between short-term and long-term interest rate

- How different government and business bonds vary

- Exchange rate

- Gold price change

Comparing APT and CAPM, the latter is more of a limited strategy The APT wouldnot require that a stock portfolio exists, but unlike the CAPM does not point out all ofits risk factors The APT allows for specific stocks to be mispriced, and hence onlyrefers to investments that are diversified Additionally, different variables may be usedfor multifactor models because the number of factors and individual factors are notknown Despite not following any of the unrealistic CAPM expectations, the CAPMtends to gather attention because of its versatility and broad sector proxies Researchhas suggested alternate asset valuation mechanisms to the CAPM Research has oftenspecifically criticized the CAPM assumption As a consequence, the APT is a financialasset model, which was given various macroeconomic elements for a suitable levelwhen interpreting the shift of expected returns in some particular economy and at somespecific point However, it is not the best result of the APT model, and is tougher todecide which variables and what variables to pick into the model.

2.1.2 The Fama French three-factor model

For scholastics through the 1990s, the capital asset pricing model (CAPM) as a modelfor acknowledging the pricing of companies in a sector – was essentially the biggestdistraction around the local region Moreover, the CAPM was renowned for itsexpansive business acknowledgments Nonetheless, as was furthermore observed, theCAPM was absolutely not succeed as a historical asset pricing model, which furtherincited Eugene Fama and Kenneth French's confidence in a non-beta model asproviding an increasingly clarification of the data Following the footsteps of WilliamSharpe, an analysis was found out which had a major effect on how the CAPM modelwas designed and created Their analysis is focused on a model that integrates all thevariables that usually influence the predicted return, including company scale,financial leverage, E/P ratio, BE/ME ratio, and stock beta They conclude that theassociation between beta and standard deviation does not justify average stock returnssince the 1960s through the 1980s They decided that this model would kick off a greathunt for factors that can help justify stock returns than that of the single variable, thesector β implemented in the Sharpe (1964), Lintner (1965), and Black (1972) asset-pricing model Others also studied the average stock returns with respect to scale,book-to-market ratio (value), and market premium They have found that thesevariables are very relevant and have stronger signals The firm scale and book-to-market ratio are outlined in the paper since they are related to equity returns The restelement (P/E and financial leverage) are blurred by placing these variables into theformula

Continuing with this analysis, Fama and French (1993) perform a review on two forms

of stock: stocks with limited capital market value and stocks with broad capital marketvalue (also called valuable stocks) When the size factor and value factor were used inthe regression model before including beta, the findings showed that the size factorand value factor had a greater influence on market price movements than did the beta

factor According to the reports, Fama and French had applied two variables, scale andmeaning, to the model to represent the role of the factors in portfolios They say thatthe following regression model can describe equity prices.

(2)

Where:

is the expected return of asset i at time t

is the risk-free interest rate of government bonds

is the excess market return

(Small minus Big) the size risk factor

(High minus Low) the value risk factor

The coefficients , , and are the asset’s sensibility

is the constants intercept

is the error term at time

The Fama French model illustrates how citizens who take greater chances earngreater returns In this analysis, the variables SMB and HML have an effect on the

profitability of a portfolio i Portfolio i is composed of stocks that have strong growth potential and low risk Portfolio i includes valuable stocks with high and

growth stocks with low Besides, portfolio involves what relates to the financialsector in addition to what happens in the equity market

This model appeared to fit well in summarizing the findings of previous studystudies, including analyses of well-known research studies CAPM Other thanbeing checked, observational data were collected from various playing fields inSouth Africa, India, Ukraine and Taiwan Following the Fama French three-factor,the rate of return in the portfolio has proved to be consistent However, someresearchers simply believed these three variables could not strictly decide thesystematic risk premiums and did not expect there might be other factors

impacting profitability Novy-Marx (2013) found that improved gross profitabilityclarified the difference in stock returns rather than the book-to-market ratio Hou et

al (2015) observed that investment and return levels clarified variance in stockresults

2.1.3 Carhart four factor model

Nartea et al (2009) analyzed markets and noticed that the Carhart four-factor modellargely clarified momentum returns, but the Fama–French model didn't Centered onthe Fama-French three factor model, this model introduces a new factor: momentum.Carhart expands the Fama-French three factor concept by adding the momentum factor

in the combination The momentum factor is described as the difference between thereturn on winners' portfolio (the stocks which performed best in the last 3 -12 months)and the return on losers' portfolio (the stocks which performed worst in the last 3 -12months) According to the analysis of Jegadeesh and Titman (2001), they noticed thatpurchasing stock that was doing well and selling stock that were doing poorly in theprevious 3 to 12 months would improve your overall earnings This case is seenbecause you have a limited time to determine what stocks you would like to purchase.The explanation is that being the case, the economy still self-corrects Some buyersprefer to cash out their gains and sell their stocks so that they can get a cheaper deal.Another hypothesis suggested that after a significant increase in valuation, a stock wasbeyond its true value and would soon revert to it Therefore, Carhart (1997) changesthe Fama and French model by introducing a fourth element: anomaly, which isdescribed as the difference between the returns on one-year winners and losers 'Robustminus Weakness' (RMW) The WML factor is measured in the same way as the HMLfactor except that the second type is done on stock results from the previous yearinstead of from the current year (excluding the last month, t-1) The explanationbehind the B/M or momentum breakpoints emerging from a universe of largecapitalization firms is such that small capitalization stocks don't show the same traits

as large capitalization firms The outcome was of a rough formula

is the expected return on asset i

is the risk-free interest rate of government bond

the excess market return

(Small minus Big) the size risk factor (High minus Low) the value risk factor (Winner minus Loser) the momentum risk factor

The coefficients , is the asset’s sensibility

is the constants intercept

the error term of asset i at time t.

Since then, the four-factor approach has been implemented to a range of established economies like the United States, Europe, Southeast Europe and several others The model has been found to suit the data better than a three-factor model In comparison, Wei Zhang (2018) updated the Carhart four-factor model, and pointed out that reversaleffects cannot be explained by the Fama-French three-factor except for Carhart's, theirfindings were better explaining on the relation between Chinese stock returns and theirhistorical results, and provide alternative investment strategies for investors The French and Fama (2014) model also combines the five elements

2.1.4 The Fama French five factor model

∑

Where:

is the share price at time t E(dt+ττ) is the expected dividend per share in period t+ττ

r is (approximately) the long-term average expected stock return (the internal

rate of return on expected dividends)

Miller & Modigliani (1961) suggest the overall market valuation of the firm's portfolio at time t by (4)

as following:

∑

Where:

, is total equity earnings for period

the change in total book equity Dividing by the time tbook equity gives:

∑

Because of the dividend discount model, Fama-French showed that, on average, stockswith robust profitability appear to have higher projected returns than stocks with poorprofitability Fama-French (2015) propose to complement their classic Fama-Frenchthree-factor model with two additional variables, namely profitability (RMW – Robustminus Weak) and investment (CMA – Cautious minus Aggressive) factors, resulting in

a 5-factor model, which is likely to become the current benchmark for asset pricingstudies:

(4)

Where:

is the expected return on porfolio i for period t

is the risk-free interest rate of government bonds for period t

is the excess market return for period t

(Small minus Big) the size risk factor (High minus Low) the value risk factor

(Robust minus Weak) the profitability risk factor (Conservative minus Aggressive) the investment risk factor

The coefficients are the portfolio’s sensibility

is the constants intercept

is the error term of asset i at time t

According to statistical model and paper published by Stephen Cochrane, expenditurefactors and profitability factors are more susceptible to economic times than scalefactors Thus, these considerations are very important in evaluating the asymmetricalactions of hedge fund strategies over the market cycle One of the key targets of manyhedge fund strategies is to capture the risk premium correlated with market anomalies;such as where the typical small business outperforms the market This asset pricingparadigm has largely used industrialized world data and industry data from the UnitedStates In addition, Chan and Hamao (1991) also noticed that the value aspect of returnhas a strong position in understanding market portfolio returns of Japanese stocks(contradictory to the Fama and French (2010) findings) Vietnam stock market alsolacks scientific research promoting the use of the five-factor model in asset pricecalculation, however, there are methodological and empirical evaluations supportingthe use of the five-factor model over the three-factor model At the end of theforthcoming chapter, the methodology and findings from the four experiments will beaddressed in greater depth

2.2 Previous researches

2.2.2 Previous researches from developed countries

 Research in US of Ferson & Harvey (1999)

This research is focused on describing unconditional mean returns, and several studieshave studied the capacity to characterize average returns Autocorrelations of fundreturns are normally poor approximately 0.1 for limited size portfolios, although someare statistically important The HML section does not give us the opportunity tomeasure estimated returns depending on different time horizons The regressions, thecoefficients on HML become smaller and t-ratios irrelevant The business betacoefficient is typically higher where there is a fit The intercepts are usually muchnarrower while the model is also used In short, the regression intercepts are similar tozero for their three-factor construct The alphas are there, but they are often time-varying It says that the Fama-French three-factor model describes neither the returns

of this portfolio nor its Sharpe ratio Also a variant of the Fama French model whichimplements time-varying betas can be rejected

 Research in Japan of Daniel, Titman and Wei (2001)

The analytical study presented a statistically important association between the averageexcess returns and the ex-ante factor loading rankings The study revealed that Fama-French three-factor model over-predicts there be a considerable stock market returnslink among factors This loss could conceivably come from a low variance HML beta.Furthermore, the investigators have found that there is a monotonic ordering of ex anteHML factor and ex post factor loadings On the basis of their individual stockportfolio, there is a 0.586 contribution from the HML factor, with a t statistic of 14.14.According to the three-factor model, a zero intercept should be predicted According tothe model, the expected slope is negative 20.205, with 1.80 standard errors from zero.The gap between the two portfolio returns is too minimal, which calls for the Fama-French model to be dismissed

 Research in French of Souad Ajili (2002)

For all equity portfolios, Souad Ajili contrasted the Fama French three-factor modeland the CAPM in the case of the French economy between July 1991 and June 2001with the equal-weight returns of all the commodities, the value-weight returns of allthe securities, the four indices CAC40, SBF80, SBF120 and SBF250, and consideredCAPM not to be inferior The findings indicate that the Fama French three factormodel is preferable in describing returns on common stock than CAPM At theconclusion of three-factor regressions, the typical is 0.905

 Research in US of Zhu (2016)

To fill the void, Zhu expanded the Fama French five factor model with SSAEPD(Standardized Standard Asymmetric Exponential Power Distribution) and GARCH-type volatility This study is to evaluate whether the factor model is greater than theinitial Fama French 5-factor model We use US stocks data gathered from July 1963 toDecember 2013 (2015) Empirical evidence from the historical share prices indicatethat the Fama French five variables have an impact on asset valuation and the costassessment

 Research in Australia of Chiah and partners (2016)

This research used Fama-French portfolio of stocks for 31 years According to theproof, the scale, demand, rate of return, and profitability elements have a mutually

interdependent relationship with each other In general, in developing economies, thefive-factor Fama French model gives a clearer description of returns than the three-factor Fama French model and the CAPM model.

 Research in Japan of Keiichi Kubota and partner (2017)

For the long-run data for Japan, Keiichi Kubota and Hitoshi Takehara find that themarket prices are well calibrated They oppose that the Fama and French five‐ factormodel can't differentiate between Japanese data better than standard Specifically, theeffects of experiments using the RMW (Robust–minus–Weak) and the CMA(Conservative–minus–Aggressive) factors of Fama French five-factor were not goodexplanatory variables when they were used for generalized GMM tests with theHansen–Jagannathan distance scale It was concluded that three-factor modelrepresents at the same strength as the five-factor model, and it was the best way toview the details The test figure of the four-factor model is strong at 9.989, which is analmost equal as that of the Capital Asset Pricing Model (CAPM) at 10.064 Despite themoderate performance of the four-factor and five-factor versions, the three-factormodel performs higher than all of them

2.2.3 Previous researches in developing countries

 Research in European countries of Steven L, K Geert and Roberto (1999)This research explores the potential of beta and t factor by CAPM and Fama Frenchthree factor to clarify the return diversity in 12 European countries The authors ratedaccessible securities according to their betas The analysis shows that the lowest assetallocation investments produce the best potential returns Results revealed that thechosen beta portfolios were actually growing return portfolios (t=2.08 and t=2.58).Each portfolio size has a declining logarithmic trend Statistically, the small firmportfolio (ie, enterprisers) has a significant optimistic intercept 0.62% per month(t=3.43) Despite the point figures that indicate negligible amounts of the intercepts,the joint F-statistic of Gibbons et al (1989) firmly opposes the assumptions that theactual intercepts are equivalent to nil This is because the beta and size-sortedportfolios have a greater diversification than does the traditional nation portfolio by the

high The return premium associated with size-based portfolios may be attributed to the similarity risk between portfolios of various sizes.

 Research in China of Grace Xing Hu and partners (2018)

This analysis suggests the demand returns to firms' scale in China The point sample isfrom 1990 to 2016 In general, smaller businesses outperform bigger companies Thisessentially decreases the uncertainties by growing the variety of portfolios averagereturns of 1.23% To look for the Fama-French technique, SMB gains an economicallyhigh return of 0.61 per month, not just statistically important but also economicallylarge In comparison, stocks' average returns do not show consistent relationship withtheir B/M ratios The HML factor returned an average monthly return of 0.23, which isabove zero but not important There would be no relation between the demand

parameter and premium in this situation SMB has consistent positive coefficient ofFama French cross-sectional experiments and association with the return of the sector.Among three variables, SMB is the most significant for catching cross-sectionalfluctuations in Chinese stock returns Both studies suggest that the variations in returnsare largely induced by elevated uncertainty in early years Their effect would becomemuch lower as you impose the correction on data that have been gathered for a longtime

 Research in India of Harshita and partners (2015)

The analysis of data on the CNX500 over fifteen years is provided Results indicatethat Indian equity market has a favorable relationship between market capitalizationsand returns, profitability and returns, and B/M ratio and returns The Fama and French(1993) three factor asset pricing model (CAPM) is best for one portfolio, whereas theFama and French (2015) five factor model is better for multiple portfolios This modelprovides the maximum results when there is no element in the portfolio For assetsinvesting, the five factor approach is preferable

 Research in Turkey of Songul Kakilli Acaravci and partner (2017)

This research checked the validity of the five factor model by implementing it in BorsaIstanbul (BIST) during the 132-month period between July 2005 and June 2016 These

14 intersection portfolios built on the basis of size, B/M ratio, profitability andvaluation parameters have been used When the GRS-F test is performed, the null ( ) isacknowledged Therefore, it is assumed that the consumption model is right The five-factor approach seems true for the BIST as well In addition, it tends to influencefund efficiency dramatically Once average is examined, mean average value inthis model is 0.33 This gives help to the nature of Fama French five-factor modeldescribing excess portfolio returns.

2.2.4 Previous research in Vietnam

 Research of Truong Dong Loc and Duong Thi Hoang Trang (2014)

This research offers analytical data of extending the Fama-French three factor model tothe HOSE stock market The numbers came from January 2006 to December 2012.The findings indicate that the profitability of listed firms on HOSE is positivelycorrelated with the risk of the sector, size of companies and B/M ratio The datareveals that in the six portfolio, the business conditions have a major influence onprofitability of all portfolios The size factor is favorably linked with the profitability

of small-size companies (S), but negatively linked with the rate of return of large-sizecompanies (B) Finally, the HML is only positively associated with high (H) andmedium (M) B/M ratio portfolios but negatively correlated with low (L) B/M ratioportfolios We may confirm that Fama-French three-factor model is suitable inexplaining the change in profitability reported on the HOSE indices

 Research of Vo Hong Duc và Mai Duy Tan (2014)

Fama French three-factor and Fama French five-factor model where evaluated in thisreport The data used in the project is focused on 281 companies published on the HoChi Minh City Stock Exchange from January 2007 to December 2015 Regarding thethree factor model, the factor has the most consistent impact on such factor Thefollowing variables, all of which are relevant in the estimation model but add toreserve the model The model describes that the demand factor still bears positiveanticipation and original negative as well as statistically meaningful and accurate Thesize factor is optimistic and the importance factor is statistically significant Asidefrom profitability, the positive element in expenditure is profitability In conclusion,

Fama French five-factor isn't sufficient to clarify return outcomes for Vietnam stock market.

 Research of Nguyen Thi Thuy Nhi (2016)

This research is primarily focused on two versions of variables and factors of the FamaFrench model and the four-factor model by Hou (Q-factor model) This paper uses datacollected from two stock markets in HOSE and HNX over the period from January

2009 to June 2015, as well as 3 strategies to divide portfolios As a consequence, thedemand effect is positive, the SMB factor is positive with limited portfolio scale, theHML factor is negative with a large portfolio value, the RMW

factor is positive with a high ROE, the CMA is positive with low OP of the regressionmodel increased from 80% to 96% This paper utilizes the Fama French five-factormodel to illustrate more than the Q four-factor model

 Research of Huynh Ngoc Minh Tram (2017)

Based on the analysis, the findings indicate that the SMB factor ( ) has multipliedimportance of HML factor ( ) and the MRP market return factor ( ) sufficient tounderstand predicted return of stocks because of the coefficient estimates of factorswhich is statistically significant at the 5% Even, only the SMB factor and MRP factorare supposed to stay optimistic while the HML factor is almost negative This meansthat businesses that have a reduced scale or lower B/M ratio, they will still garnerincome All of the remaining RMW and CMA factors are not important Therefore,Fama French five-factor is not totally account the investment return in the Vietnamstock market There is a good association between equity price variability, market riskindex and stock returns in Vietnam

2.3 Research gap

Research on asset pricing is comprehensive in the world Also, recent findings haveprovided other findings multiple study goals and implications worldwide on assetspricing and taking plenty more from this focus

For example, research in developing nations, they provide several different analyticalobservations with several different types of measuring: OLS, GRS, GMM, GARCH-

type Or re-process the data in different forms and shapes The researches hadunfavorable findings with the influences of Ferson & Harvey (1999), Japan of Daniel,Titman, Wei (2001) and Keiichi Kubota and partner (2017) but they showed anunderstanding completely in accordance with the Fama French model According toresearch from Zhu, Souad Ajili, Chiah and collaborators, conducted on US, French andAustralia find that their model worked better than that of Fama: APT, CAPM, Carhartmodel but Fama French model is outperformed them all.

Centered on research of Steven L, K Geert and Roberto (1999), this research clearlyconfirms that by utilizing portfolio beta and size-sorted portfolios are more diversifiedthan by high of the regressions

There are more experiments on measures such as Fama French three-factor than thefive's There are several weekly, annual, and quarterly Fama French model that havenot been measured Most variables are optimistic such as HML, Nguyen Thi Thuy Nhi(2016), but certain factors are not on the authority of Truong Dong Loc and Duong ThiHoang Trang (2014) and Huynh Ngoc Minh Tram (2016) These results regardingVietnamese companies make them fascinating country and subject of more studies

Conclusion of Chapter 2

Chapter 2 attempts to summarize recent research on asset pricing that applies to FamaFrench five-factor model Other variables include the three-factor built by FamaFrench, four-factor generated by Carhart, and five-factor created by Fama French Thefindings of this research are combined with those of previous reports Chaptercontinues with references to other works and fields that require more study

CHAPTER 3: DATA AND METHODOLOGY

3.1 Data construction and processing method

3.1.1 Data sources

This research is focused on industries dealing in HOSE and HNX The year spans theperiod from 2014-2019 The author is using quarterly data from January 2014 toDecember 2019 That is why only freshly listed manufacturing companies are chosen

to create this survey Many companies are omitted from the study, and this is attributed

to the bad results of financial operations and regulation After mulling through thoseparameters I eventually pick the top 100 firms scattered over the 6-year era

Trinh Minh Quang (2017) used a Thomson Reuters database These details onmonitoring and independent variables are taken from various newspapers in Vietnam:Vietstock, Cafef, VnDirect, Sbv, these sources are incorporated in the annual reports ofthe projects in Vietnam The aim of this analysis is to evaluate the Fama French five-factor model of stock return with listed industrial companies in Vietnam stock market

3.1.2 Data processing method

Step 1: Data collecting

The details on variables such as the outstanding bonds, properties, net profit after tax(quarter), closed-price of securities, book value (BE), market value (ME), the VN-index (day) and the yield on treasury bill is taken from the website of the State Bank ofVietnam

Step 2: Data processing

I use the database from phase 1 to measure the cost of return of each stock , the rate

of return of the market fund , the valuation quota – B/M ratio, the size quota – Size(ME.complete outstanding shares), the benefit quota – Net profit after tax OP, theinvestment pattern quota – Inv (The development of total asset), and the risk-freeinterest rate from Vietnam Treasury bill

Step 3: Dividing and building up portfolios.

According to the 4 quotas, including scale, B/M ratio, OP, and Inv divided yield to 18portfolios will be created, and the detailed information will be given in the followingsection

Step 4: Measuring five factors

Summarizing the five sample variables in Microsoft Excel, which reflect Small minusBig (SMB) - the difference between returns on small and big size stocks for period t,HML (High minus Low) – the difference between returns on high and low book-to-market ratio stocks for period t, RMW (Robust minus Weak) – the difference betweenreturns on robust and weak profitability stocks for period t, CMA (Conservative minusAggressive) –the difference between returns on conservative and aggressiveinvestment for period t Calculate these variables, explain it statistically and look at theassociation between them Calculate these factors by utilizing regression methods tosee the interaction between them

Step 5: Running the simulations, then doing the regression study

Sorting portfolios in Excel with Stata in order to manage confusing of variables, returnvariance of explanatory variables, run regression models and verify the utility of thesemodels for the business in question

Step 6: Analysis of research results and give conclusions

The findings suggest that the causes, in particular, affect rates of investment In thisway, go into the mathematical research for regression and render the final decisionsfor the investors and business holders

3.1.3 Data analysis tool

Data is analyzed using Stata version 13 and regression results are generated MicrosoftOffice Excel is used to incorporate the sample results

is the expected return on porfolio i for period t

is the risk-free interest rate of government bonds for period t

is the excess market return for period t

: is the Small Minus Big cause on the quarter t that was added in the FamaFrench (1993) The line reflects the gap in average return between the portfolio ofsmall stocks and large stocks in the industry Portfolios are developed with marketcapitalization (a proxy for size) for financial statements prepared for the quarter ended

in t -1

: is the High Minus Low typical risk factor on the day t that was implemented byFama and French (1993) It indicates the relative gap in the return between a portfolioinvesting in stocks with the maximum book-to-market ratio and a portfolio invested instocks with the lowest book-to-market ratio Portfolios are shaped in a quarter tdependent on the ratios of inventory values to revenue for the fiscal quarter ending in t-1

: is the Robust Minus Weak Low typical risk factor on the day t that was

implemented by Fama and French (2015) It reflects the average gap in the industry between the top performing stocks and the worst performing stocks Portfolios are created every quarter t in each department in order to calculate profitability based onaccounting results t -1

: is the Conservative Minus Aggressive typical risk factor on the day t that was implemented by Fama and French (2015) The gap of performance between the most cautious portfolio and the most bullish portfolio in the capital market Portfolios are created in a quarter t dependent on the rise in net assets for the preceding fiscal quarter

t -1 divided by the total assets at the end of the last fiscal quarter t -1

3.2.2 Measurement of variables

The inquiry is pursued the Fama and French (1993, 2015) strategy of process andcomputation In the quarter of each year (quarter t), firms are sorted and allocated intoportfolios dependent on four factors, which are market capitalization, book-to-marketratio of shares, profitability, and investment These are as follows:

Stock return : the average rate of return by days of quarter If is the ending price

of the stock at quarter , then is the ending price of the stock at quarter t-1 if thestock's rate of return at quarter can be approximated as follows:

Market return : from the VN-Index (day). The variable is measured every quarter,

and is dependent on each quarter's interest rate Vn-Index is called Vn-Index at quarter

t and Vn-Index quarter is only Vn-Index quarter So regular rate of return

is determined as follows:

Risk-free rate of return (stands for “Market”): the principal interest rate 1-year term

of Treasury bill issued by the Reserve bank of Vietnam from January 2014 to

December 2019 This risk-free rate is equal to risk-free interest rate quarterly t divided

by 4 quarters

Market capitalization (stands for “Size”): the product of number of shares

outstanding and the market price per share, as on the last day of each quarter t:

Profitability (stands for “OP”): the return on equity (ROE), which is measured by

number of sales remaining after all operating expenses, interest, depreciation, taxesand preferred stock dividends has been deducted from a company's total revenue

Investment (stands for “Inv”): using asset growth as a proxy for investment If the

total assets in quarter t and the total assets in quarter t-1, following Cooper et al.

(2008), Fama and French (2008), Gray and Johnson (2011) and Fama and French(2014) Asset growth is defined as follows: