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This thesis examines whether adding macroeconomic variables - specifically inflation, exchange rate volatility, and credit growth - enhances the explanatory and pricing power of traditional factor models in equity markets. Using monthly data from January 2015 to December 2024, I test the Fama-French 3-Factor, Fama-French 5-Factor, and Q-Factor models on portfolios constructed from U.S. and Indian equities. Macroeconomic extensions are evaluated through time-series regressions and cross-sectional Fama-MacBeth regressions. The fundamental goal is to assess whether macro variables materially improve model performance, particularly in emerging markets. The main result shows that in the United States, firm-level factors alone explain most return variation, while in India, incorporating macroeconomic risks - especially currency volatility - significantly enhances model fit and reduces unexplained ?. These findings suggest that the role of macroeconomic shocks in pricing assets is structurally more important in emerging economies than in developed markets.
