New factors in asset pricing

Sammanfattning: The purpose of this thesis is to study the relationship between the different risk factors of the Fama and French (2015) five-factor model on Northern European data from 1985 to 2014. We find that their five-factor model for cross-sectional asset pricing, including market return, size, book-to-market equity (B/M), profitability and investment as factors of return, only performs slightly better than their three-factor model. We also test one of their findings: that adding investment and profitability removes the explanatory power of the B/M factor and find no such evidence. In fact, the B/M factor is vital for the model. Contradictory to previous research, we also observe that big stocks have outperformed small stocks. Moreover, we observe that the significance of the size factor is lost with the inclusion of the book-to-market factor.