Improvement of the Fama-French Five Factors Model in Terms of The US Dollar Index

Abstract

Contemporarily, the Fama-French Five Factors (FF5) model is a well-known asset pricing model, which establishes a model with five fundamental factors of market in order to explain the return of stocks and has an excellent performance in the market. This paper attempts to improve the FF5 factors asset pricing model by introducing the macroeconomic factor of the exchange rate. Primarily, the monthly circulating market value, monthly book market value ratio, monthly profitability, and monthly total asset growth rate of all U.S. stocks are selected. The method in this paper calculates and processes it and obtains the time series of the FF5 basic factor. Afterwards, we use the monthly variation extent of the US dollar index to represent exchange rate changes to improve the model, select 22 representative stocks from U.S. stocks to test. Subsequently, the advantages and disadvantages of the new model are compared with the FF5 model. According to the analysis, the new model has enhanced the ability to interpret the yield of most stocks and greatly enhanced the ability to interpret the stocks of large international companies. These results shed light on guiding further exploration of asset pricing model.