Evaluating Complexity and Macroeconomic Variables in Multifactor Models

Abstract

The purpose of this paper is to identify the benefits of using multifactor models compared to the uni-factor CAPM equation. The paper then examines the explanatory power of common variables in multifactor explanations for expected returns and categorizes these variables into macroeconomic factors and firm-specific factors. This examination will help identify what macroeconomic factors play a substantial role in expected returns and whether the model benefits more by including firm-specific factors compared to macroeconomic factors.