A Comparison of New Factor Models in the Korean Stock Market

Abstract

We compare the empirical performance of the Fama and French (2015) five-factor model, the Hou et al. (2015) q-factor model, and their variations in the Korean stock market. Among the models considered, we demonstrate that the adjusted five-factor model, which includes the quarterly- rather than the yearly-based profitability factor, best explains the size-, value-, investment-, and profitability-sorted portfolio returns. We also document supporting evidence that high-minus-low (HML) may not be a redundant factor in the existence of q-factors. The adjusted five-factor model outperforms the other factor models in digesting various anomalies in the Korean market.