Fama/French: Five-factor asset pricing model - Adding momentum factor

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Fama/French: Five-factor asset pricing model - Adding momentum factor

edited Jul 1, 2019

Finance Theory Getting Started Momentum Research Risk Management

Hello,

First of all, please apologize my English since I am not a native speaker. I am new to finance and programming. I have tried to replicate the Fama/French paper with Python. Fortunately, almost all data they have used is available on Kenneth French's website, so I could calculate all the values in the tables with 'simple programming' and doing OLS regressions. I then wanted to extend the FF5 model with the MOMENTUM factor, which is also available on French's website. I re-run the regressions with my new 'FF6' model and want to compare the average absolute intercepts in order to see if they are now lower with the additional factor (I was not able to compute the GRS statistic so I picked the average absolute intercept). My idea is based on the carharrt four factor model, which also simply adds the momentum the momentum factor to the size and value factor. I have also read some reviews of Fama & French's 'A five-factor asset pricing model' where it was criticized that they did not consider the momentum factor. So I thought I just give it a try.

I know that it is very naive to think that I can just add the momentum factor to the FF5 model and think that I have now created a better performing model in terms of explaining cross sectional returns. But since I am new to finance, I am not sure where the actual constraints are in just adding the momentum factor to the model. Could anyone tell me where the problem is in my approach?

Also I have another general question:
Fama & French themselves say that the FF5 model's main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that invest a lost despite low profitability. I understand the papers main idea and the method, but I am not exactly sure what they mean with this and where I can see this in their paper. Could anyone help me with this?

I am not sure if this is the right forum to ask these questions, but some posts here have helped me to better learn Python, so I thought I will give it a try. Many thanks in advance!

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In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.