Evaluating Fama–French Five-Factor Model Across Large and Small Indian Equity Portfolios

Abstract

Explaining asset-pricing behaviour remains a significant challenge in emerging markets, where structural inefficiencies, market volatility, and differences in investor behaviour can influence equity returns. This study examines the comparative performance of the Fama–French Five-Factor (FF5F) model against the Capital Asset Pricing Model (CAPM) and the Fama–French Three-Factor (FF3F) model across large- and small-cap portfolios in the Indian stock market. Monthly stock-return data for companies included in the NIFTY 500 Index from January 2015 to December 2024 are analysed using time-series Ordinary Least Squares (OLS) regression. Model performance is evaluated using adjusted R², Akaike Information Criterion (AIC), and Bayesian Information Criterion (BIC). The findings indicate that the FF5F model provides greater explanatory power than CAPM and FF3F, particularly for large-cap portfolios, where the profitability (RMW) and investment (CMA) factors play important roles in explaining returns. In contrast, small-cap portfolios exhibit greater sensitivity to market volatility, reflected in their relationship with India VIX. The study provides India-specific empirical evidence based on a broad NIFTY 500 sample and highlights differences in factor behaviour across large-cap and small-cap portfolios. These findings contribute to a better understanding of the applicability of multifactor asset-pricing models in an emerging-market context and provide insights into the heterogeneous behaviour of factor exposures across segments of the Indian equity market.