Testing alternative versions of the Fama-French five-factor model in the UK

This paper evaluates whether the new Fama-French five-factor model is able to offer an improved method for pricing investment risk in UK equity returns. The paper extends previous studies by testing alternative specifications of the profitability factor. The initial tests indicate that a respecified five-factor model-using gross profit rather than operating profit-provides an improved description of UK equity returns. However, the factors tested perform inconsistently when evaluated against different test portfolios and neither the value nor investment premiums are consistently priced. As well as highlighting the importance of testing factor models using an array of different test portfolios, the results show that both the three- and five-factor models are unable to offer a convincing description of UK equity returns and therefore cannot be considered a reliable measure of financial risk.