Testing the carhart four-factor model

Abstract

The objective of the study was to understand the validity of Carhart four-factor Model. Asset pricing models suggest that there is no premium for idiosyncratic risk and expected returns should be linked to systematic exposure only. Fama French model suggested that factors like size and book to market equity also matter. Carhart suggested to further include momentum as a factor to predict the returns more accurately. This study focuses on testing the validity of Carhart four-factor model. Securities considered for this exercise are the ones that were traded on NYSE, Amex and NASDAQ and the time period considered was 1966 till 2012. This data was downloaded from Wharton Research Data Services (WRDS). Securities with price lower than USD 5 were be filtered out to avoid any market microstructure issues.