Looking for Macro Factors: Testing Fama-French’s Five-Factor Model and Adding Macroeconomic Data
Buttron, Yvonne C., 1982--
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This research project was to utilize the capital asset pricing model on the Dow Jones Industrial Average constituents over a ten-year period against the S&P 500 as a substitute for the market. Upon these findings, Fama-French’s five factors were added to see if findings held consistent with Eugene Fama and Kenneth French’s finding of these factors significantly explain return variation. After these results were found, additional factors from the macroeconomic environment were added to see if additional risk factors could be added into the formula. The four factors chosen were the US unemployment rate, the consumer price index, WTI crude oil prices, and the ten-year treasury. These factors were chosen due to their apparent relevance and extensive news coverage in the US economy over the last decade and the availability of reliable data retrieved from the St. Louis Federal Reserve economic database, FRED. The regressions done for the CAPM model revealed that the model, by itself, is not good predictor of returns. The addition of the five factors added more accuracy but CMA was deemed an insignificant factor. The final macroeconomic factors were added and found that crude oil and the ten-year treasury yield were insignificant. These findings could be considered further to see why the unemployment rate and consumer price index would correlate with returns to find other risk factors to make a more accurate model.