Exploring The Fama-French Five Factor Model Within a Time-Varying Parameters Framework

This paper evaluates whether time-variable parameters are present in the Five- Factor Model. The presence of time-dependent parameters may impact the asset pricing mechanism at the very core of the model. To investigate this assumption, we employed the global-local shrinkage priors in the Time-Varying Parameter models approach. We tested five key industry portfolios, covering a time window from July of 1963 to June 2022, obtaining 708 monthly observations. The results suggest that time dependency is present at the level of parameters. Furthermore, the pricing capability of the pricing factors is influenced by industry specifics while macroeconomic shocks impact various industries.