Exploring the Role of the Momentum Factor in Asset Pricing Models: An Empirical Analysis of the Oslo Stoel! Exchange (OSE) from July 1989 to June 2020

Abstract

This thesis tests if the Fama and French five-factor model including momentum can explaining stock returns on OSE. The inclusion of momentum factor enhances model performance, with an increased adjusted R2 from 0.65 to 0.74 for momentum portfolios. These results are robust across factor constructions and show a general increase in adjusted R2 from 0.67 to 0.70 for all portfolios, primarily driven by size-MOM portfolios. Comparing competing models, the five-factor model with momentum consistently outperforms the three-factor model in terms of adjusted R2. While evidence supports the RMW factor in sub-samples, no statistically significant support is found for the CMA factor. Further testing without CMA is required for conclusive results. The findings hold for both the five-factor model and the five-factor model with momentum on size-B/M portfolios. Given the modest improvement, a parsimonious approach is recommended, favouring the three-factor model with momentum.