Testing of Five Factor Asset Pricing Model in Indian and South Korean Stock Markets

The purpose of the study is to empirically examine the performance of the five-factor asset pricing model in India and the Korean stock market. We study the 17 years data of both the stock market and analyse the presence of market, size, value, profitability and investment effect. The study further tries to explore the explanatory power of the three and five-factor asset pricing model in both the Asian markets. The author examines the performance of models using Fama-French methodology of portfolio construction. The results of univariate and multivariate regression analysis help to identify the presence of various risk factors in both the markets as well as the applicability of a model which can better explain such factors. The results highlight the presence of strong market, size, value, profitability and investment effect in India and Korean stock market. However, the investment effect which was found to be stronger for the small stock portfolio in the Indian equity market, remains weak in the Korean stock market. Similarly, a stronger size effect in low operating profitability quantile is being documented in the Korean stock market in contrast to the stock market of India. The paper further highlighted the better explanatory power of five factor model in contrast to the three factor model for both the stock markets. However, the model works marginally well in Indian stock market in comparison to the stock market of Korea. The future study can try to evaluate the sectoral wise applicability of asset pricing models in emerging nations. Similarly, analysis of the applicability of asset pricing models in various developed and developing nations will help to find the international evidence of asset pricing models. Further, the study of additional risk factors supported by theoretical evidence can further help to improve the explanatory power of models. The current study evaluating the applicability of asset pricing model will have a practical implication for global portfolio managers, policy makers, researchers and academicians. It will help the portfolio managers in evaluating the performance of the portfolios and determining the cost of equity in the overall cost of capital. The study will also aid the investors in their investment decision making by helping them to identify the average stock return in different nations.