MODELING CAPITAL ASSET RETURNS ON THE SWEDISH STOCK MARKET - An evaluation of Fama French’s Five Factor Model against its predecessors

Abstract: This thesis compared the explanatory rate of three asset pricing models related to excess returns on the Swedish stock market. A more granular evaluation of each model’s factors was also conducted. A random sample of 90 companies was drawn from the Stockholm Stock Exchange (N = 371) using a Blomberg terminal. From this sample, 22 value-weighted portfolios were constructed to create three asset pricing models known as the Fama French Three Factor model, Carhart Four Factor Model and the Fama French Five Factor model. Out of these 22 portfolios, 18 were evaluated using each of the three models. Specific model assumptions such as VIF-values, time dependence and the normality of the standardized residuals were assessed on the individual portfolios and variables of each model. The results concluded that the Fama French Five Factor model outperformed both the Fama French Three Factor model and the Carhart Four Factor model with a higher R squared on average. The most consistent factor of the models was the SMB of the Fama French Five Factor model.