In this recipe, we implement two extensions of the Fama-French three-factor model.
Carhart's Four-Factor model: The underlying assumption of this extension is that, within a short period of time, a winner stock will remain a winner, while a loser will remain a loser. An example of a criterion for classifying winners and losers could be the last 12-month cumulative total returns. After identifying the two groups, we long the winners and short the losers within a certain holding period.
The momentum factor (WML; Winners Minus Losers) measures the excess returns of the winner stocks over the loser stocks in the past 12 months (please refer to the See also section of this recipe for references on the calculations of the momentum factor).
The four-factor model can be expressed:
Fama-French's Five-Factor model: Fama...
