Article2013

A Respecified Fama French Three‐Factor Model for the New European Union Member States

47 citations0/0 files storedJournal of International Financial Management and Accounting

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

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) three‐factor 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.

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References

1993Common risk factors in the returns on stocks and bonds 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1970Efficient Capital Markets: A Review of Theory and Empirical Work 1991Earnings Management During Import Relief Investigations 1995Detecting Earnings Management.1981The relationship between return and market value of common stocks 1994Contrarian Investment, Extrapolation, and Risk

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