Research on the Decisive Factors of Portfolio Return in Stock Market – Based on the Extension of Five-factor Asset Pricing Model

Abstract

Based on Fama and French's five-factor model, this paper introduces a new momentum factor MOM on the extension of MKT, SMB, HML, RMW, and CMA, aiming to explore which factor has a relatively greater impact on the change of the stock market. Data of six portfolios from the year 1963 to 2019 at the start of each month are selected to deduce their relationship with six factors through multiple linear regression. Variance inflation factor and correlation coefficient are both calculated to exclude the multicollinearity among the regressors. R-squared about six portfolios are all above 0.9, meaning that six portfolios fit the six-factor model well. The results indicate that the factor MKT is positively significant to all six portfolios, and the coefficient of MKT is the highest among all the factors, very close to 1 or even above, which suggests MKT has the biggest impact on six portfolios and the six portfolios fit the market trend well. The outcome also illustrates that factor MOM is of less significance to the six portfolios. However, MOM is negatively significant to portfolios 1,2,5, and 6, thus should not be ignored.