Comparison of the Fama & French five-factor and the q-factor models Evidence from the Swedish stock market

Abstract

This thesis compares the q-factor model and the Fama and French five-factor model in explaining stock returns on the Swedish stock market. Using data from January 1998 to December 2023, portfolios were constructed based on both models to evaluate their performance. The results reveal that neither model fully captures the dynamics of the Swedish market. The intercept and factor analyses indicate that the q-factor model outperforms the Fama and French model, with better performance across most factors except size. The GRS test shows that neither model fits the market perfectly, while the R2 test indicates that the q-factor model has greater explanatory power compared to the Fama and French five-factor model. This research contributes to understanding asset pricing models’ applicability in the Swedish market, providing insights valuable to investors and financial practitioners.