Four Factors Model in Asset Pricing: Fama&French Three Factors Model is Combined With Liquidity in the Stock Exchange of Vietnam

This paper aims to assess the application of Fama and French three factors models in Vietnam’s stock market from January 2007 to December 2011. The selected listing companies must continuously had been listed for at least 2 years and non-stop trading or moved to the other exchange. According that, in 2007 the author selected 162 companies, and in 2008, 2009, 2010 and 2011, there were 204, 308, 382, 382 listed companies were selected in turn. The author also divided them into 6 groups: B/H, B/M, B/L; S/H, S/M and S/L. In which, portfolios B and S are to evaluate the effects of size and risk scale to the profitability rate (size measured by capitalization of the stock market) and portfolios H, M and L are measuring the effects of book to market value. The result are appearing that Fama and French three factor models explaining the relationship between rate of return and risk in superior to CAPM. This research also evaluates the impacts of liquidity and risk of liquidity to stock returns which were listed in Tran Viet Hoang; Nguyen Ngoc Huy; Nguyen Anh Phong 29 Vietnamese stock market. According to this research, liquidity ratio is the portion between number of share traded and number of share outstanding (this called Liq2) as same as Amihud and Mendelson’s research (1986), Datar-Naik and Radcliffe’s research (1998), and Wang and Iorio’s research (2007). Moreover, the authors also use the alternative approaches to evaluate liquidity: the average of traded value in a month (this called Liq1). Contrary to previous researches, this research shows that correlations between indicators Liq1 and Liq2 and stock returns are positively correlations. Finally, we evaluates four factor model by combing the FF3 and liquidity. The result are appearing this models explaining the relationship between rate of returns and risk in superior to CAPM and FF3. So we suggest the four factor model: FF3 combined with liquidity in evaluating stocks exchange of Viet Nam.