An Empirical Study of CAPM, the Fama-French three-factor and the Fama-French five-factor Model - A Study Performed on the Swedish Stock Market.

Abstract

This thesis aims to add further research about the Fama-French five-factor model and its ability to explain average returns on the Swedish Stock Market. Additionally, the study also investigates and compares the performance of CAPM, the Fama-French three-factor model and the Fama-French five-factor model. The study rejects all three models’ ability to explain average returns of the Size-B/M, Size-OP, and of the aggregated portfolios. In contrast, only the Fama-French three-factor model was rejected in terms of explaining the average returns of the Size-Inv portfolio, indicating that CAPM and the Fama-French five-factor model can be used as explanatory models for portfolios sorted on size and investments. Due to the ambiguous results, the study could not conclude whether one model is preferable the others which may be the explanation behind why CAPM is still widely used despite years of criticism. Even though the Fama-French three- and five-factor models were invented relatively near in time, the study did not indicate that these models are superior to CAPM.