A Comparison of Asset Pricing Models on Nordic Markets

Abstract: This paper applies the Fama and French five-factor model to Nordic stock markets, comparing its performance to the Fama and French three-factor model and CAPM. The five-factor model is not found to outperform the three-factor model or CAPM. While the five-factor model performs well in GRS tests, the model exhibits high values of average absolute alpha as compared to the three-factor model, suggesting that the three-factor model may be more reliable for analysis on Nordic stock markets. Furthermore, the size-factor, value-factor and profitability factor are found to be redundant for describing average returns in the sample. The paper concludes that the five-factor model is not well-suited for analysis on the Nordic stock markets.