A panel data robust instrumental variable approach: a test of the new Fama-French five-factor model

Fama and French (FF, 2015) propose a new five-factor asset pricing model that adds profitability and investment patterns to the market, size, and value variables used in FF (1992). Our purpose is to investigate this new model using an improved GMM-based robust instrumental variables technique in a fixed effects panel data framework. To test for measurement errors, we use a modified Hausman artificial regression. We also examine an augmented FF six-factor model that includes the Pástor-Stambaugh (PS, 2003) liquidity factor. Using the FF data set, our GMM-based panel data approach leads us to conclude that the only consistently significant factor is the market factor.