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Multifactor Models and their Consistency with the ICAPM: Evidence from the European Stock Market
Author(s) -
Lutzenberger Fabian T.
Publication year - 2015
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12050
Subject(s) - explanatory power , consistency (knowledge bases) , capital asset pricing model , econometrics , factor analysis , economics , predictive power , stock (firearms) , financial economics , psychology , philosophy , geometry , mathematics , epistemology , mechanical engineering , engineering
This paper conducts a European investigation of eight multifactor models that have been previously tested using US data. Many results confirm the US evidence: Most of the eight multifactor models investigated do a good job explaining the cross‐section of our testing portfolios, but most models are not justifiable by the Intertemporal CAPM (ICAPM). Carhart's four‐factor model shows the best empirical performance and consistency with the ICAPM. Nevertheless, some results counter the US evidence: Fama and French's three‐factor model is inconsistent with the ICAPM and the models of Hahn and Lee (2006) and Koijen et al. (2010) show low explanatory power.