Using the Capital Asset Pricing Model and the Fama–French Three-Factor and Five-Factor Models to Manage Stock and Bond Portfolios: Evidence from Timor-Leste

Fernando Anuno (), Mara Madaleno and Elisabete Vieira
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Fernando Anuno: Faculty of Economics and Management, National University of Timor Lorosa’e (UNTL), Díli 10000, Timor-Leste
Mara Madaleno: GOVCOPP—Research Unit on Governance, Competitiveness and Public Policies, Department of Economics, Management, Industrial Engineering and Tourism(DEGEIT), University of Aveiro, Campus Universitário de Santiago, 3810-193 Aveiro, Portugal
Elisabete Vieira: GOVCOPP Unit Research, Aveiro Institute of Accounting and Administration, University of Aveiro (ISCA-UA), Campus Universitário de Santiago, 3810-902 Aveiro, Portugal

JRFM, 2023, vol. 16, issue 11, 1-22

Abstract: Timor-Leste is a new country still in the process of economic development and does not yet have a capital market for stock and bond investments. These two asset classes have been invested in international capital markets such as the US, the UK, Japan, and Europe. We examine the performance of the capital asset pricing model (CAPM) and the Fama–French three-factor and five-factor models on the excess returns of Timor-Leste’s equity and bond investments in the international market over the period 2006 to 2019. Our empirical results show that the market factor (MKT) is positively and significantly associated with the excess returns of the CAPM and the Fama–French three-factor and five-factor models. Moreover, the two variables Small Minus Big (SMB) as a size factor and High Minus Low (HML) as a value factor have a negative and significant effect on the excess returns in the Fama–French three-factor model and five-factor model. Further analysis revealed that the explanatory power of the Fama–French five-factor model is that the Robust Minus Weak (RMW) factor as a profitability factor is positively and significantly associated with excess returns, while the Conservative Minus Aggressive (CMA) factor as an investment factor is insignificant.

Keywords: CAPM; Fama–French three-factor model; Fama–French five-factor model; emerging market (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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