March 2007 paper entitled "Too Many Factors! Do We Need Them All?", Soosung Hwang and Chensheng Lu seek to identify the minimum number of economically fundamental factors needed to explain why different stocks generate different returns.
Now if you go through the paper and read it , it has tested 16 factors considered to affect equity returns and concludes that liquidity is the most important factor followed by momentum. The study conclusion is only three factors are necessary and sufficient to explain difference in returns among individual stocks, with liquidity the most influential.
Too Many Factors! Do We Need Them All?
Cass Business School - Faculty of Finance
City University London - Sir John Cass Business School March 2007
We investigate more than a dozen of factors formed on firm characteristics and risk measures that have been claimed to be able to explain cross-sectional asset returns in the literature. In accordance to Fama and French (1993, 1996a), we use these factors in asset pricing, and show that the market portfolio, liquidity and coskewness explain the stock returns as well as the famous Fama-French three factors with momentum. In particular, in most sample periods tested, individual stocks' alphas are insignificant with only two factors, market portfolio and liquidity; in addition, many factors are redundant in asset pricing and are likely to come from data-mining.