A respecified Fama French three-factor model for the new European Union member states
Keywords:
theory of market margins;
return on equities;
Fama French model.
Author(s):
James Foye, PhD (Faculty of Economics, University of Ljubljana); Dušan Mramor, PhD (Faculty of Economics, University of Ljubljana); Marko Pahor, PhD (Faculty of Economics, University of Ljubljana).
Abstract:
This study uses factor models to explain stock market returns in the Eastern European (EE) countries that joined the European Union (EU) in 2004. In line with other studies, we find that the market value of equity component in the Fama French (1993) threefactor model performs poorly when applied to our emerging markets dataset. We propose a significant amendment to the standard three-factor model by replacing the market value of equity factor with a term that proxies for accounting manipulation. We show that our three-factor model is able to explain returns in the EE EU nations significantly better than the Fama French (1993) three-factor model, hereby offering an alternative model for use in the numerous markets in which previous studies have found little correlation between market value of equity and equity returns.
Journal:
Journal of International Financial Management & Accounting; Volume 24, Issue 1, pages 3–25, Spring 2013
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