What additional factor does the Fama-French Carhart Model incorporate?

The Fama-French Carhart Model expands upon the Fama-French three-factor model by incorporating the factor of momentum, also known as the Carhart momentum factor. This model assesses stock returns by considering not just the market risk, size of the company (market capitalization), and book-to-market value (value factor), but also how past performance influences future returns.

Momentum in the context of this model refers to the tendency of stocks that have performed well in the past to continue to do well in the near term, while those that have performed poorly are likely to continue to underperform. By accounting for momentum, the Carhart model provides a more comprehensive framework for understanding asset pricing and returns, acknowledging that investor behavior and market trends can create persistent patterns over time.

The other factors listed, such as market volatility, market capitalization, and interest rates, play important roles in different financial models but are not the additional component that the Carhart model introduces beyond the Fama-French factors. The inclusion of momentum gives the model an edge in explaining anomalies in stock returns that cannot be fully accounted for by the traditional factors alone.