University of Oulu

Effect of financial crisis on FF5 risk-factors

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Author: Ruokonen, Jere1
Organizations: 1University of Oulu, Oulu Business School, Department of Finance, Finance
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.9 MB)
Pages: 101
Persistent link:
Language: English
Published: Oulu : J. Ruokonen, 2019
Publish Date: 2019-10-28
Thesis type: Master's thesis
Tutor: Sahlström, Petri
Reviewer: Kallunki, Juha-Pekka
Sahlström, Petri


This thesis gives an overview of the research that has been conducted studying major risk-factors (size, value, profitability, momentum, investments) and Fama-French asset pricing models. Aim of this thesis is to study changes in major risk factors at the U.S. equity markets after the global financial crisis. The empirical part of this thesis uses three 120-month periods of daily data, focusing mainly on changes between the 120 months before and after the global financial crisis using the end of 2008 as a breakpoint for data. Also, the performance of the Fama-French five-factor model is evaluated in three different periods, revealing information on how the model works with various samples of data.

Research set up follows mainly similar approach as in Fama and French asset-pricing studies by using portfolio sorts of different characteristics and portfolios that mimic risk factor returns. This thesis adds to the existing literature by evaluating three short periods of 120-months and comparing relative changes on these periods. The main focus is comparing risk-factor coefficients, risk factor return patterns, and performance of the Fama-French five-factor model in (01/1999–12/2008) data sample to (01/2009–12/2018) data sample in the U.S. equity market. The third period is used to control and point the magnitude of changes after the financial crisis.

Results of the empirical part of this thesis reveal significant differences in risk-factors after the financial crisis. Previously discovered risk-factor return patterns disappear in the period after the financial crisis. This change is significant as clear and strong patterns of risks factor effects in average returns can be seen in the first two periods. Regression tests reveal clear trends in risk-factors coefficients. Profitability factor obtains explanatory power (importance) coming to the present day as the value factor loses explanatory power. Size factor gains on small firms’ categories but loses on big-sized firms. Investment factor does not play a significant part in explaining returns in general in the period after the financial crisis. Fama-French five-factor model performance is persistently highest in the period after the financial crisis supporting its usage on different applications.

Main findings show enhanced importance of profitability factor. This signs of the increased importance of quality characteristics of firms in explaining the excess returns in line with recent quality-based studies.

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Copyright information: © Jere Ruokonen, 2019. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.