Extended Six-Factor Asset Pricing Model and ESG Return Persistence: Evidence from Developed and Emerging Markets

Tee, Jia Jie (2025) Extended Six-Factor Asset Pricing Model and ESG Return Persistence: Evidence from Developed and Emerging Markets. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the robustness of an extended six-factor asset pricing model in explaining ESG (Environmental, Social, and Governance) stock returns across developed (U.S., UK, Japan) and emerging (Malaysia, Indonesia, Taiwan) markets from 2018 to 2024. By integrating the momentum factor (WML) into the Fama-French Five-Factor Model (FF5FM), the study evaluates its performance against FF3FM, Carhart Four-Factor Model (C4FM), and FF5FM using time-series regressions. Static and dynamic panel data models are employed to reduce country-specific bias and assess return persistence, while a dynamic panel threshold model explores how ESG scores above or below certain thresholds affect return persistence. The results indicate that the market risk premium (MRP) is the most consistent and significant factor, positively influencing ESG stock returns across all markets. Profitability (RMW) and investment (CMA) factors are generally insignificant. The six-factor model with the inclusion of momentum factor improves model performance, particularly in the U.S., Malaysia, Taiwan, and Indonesia. Pooled OLS findings confirm the positive effect of MRP and the negative effect of WML. Return persistence differs between market types, which developed markets exhibit mean reversion, while emerging markets display stronger momentum. ESG score thresholds influence return behaviour, with stronger return persistence effect observed in stocks below the threshold, especially in developed markets. This study contributes to sustainable finance by integrating momentum into the FF5FM and applying threshold analysis to ESG scores, offering practical insights for ESG-focused investors and policymakers. Keywords: ESG Stocks, Asset Pricing Models, Six-Factor Model, Return Persistence, Threshold Analysis, Sustainable Finance