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A Respecified Fama French Three‐Factor Model for the New European Union Member States
Author(s) -
Foye James,
Mramor Dušan,
Pahor Marko
Publication year - 2013
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12005
Subject(s) - equity (law) , economics , factor analysis , financial economics , stock (firearms) , econometrics , value (mathematics) , european union , emerging markets , stock market , international economics , macroeconomics , geography , statistics , mathematics , political science , context (archaeology) , archaeology , law
This study uses factor models to explain stock market returns in the E astern E uropean ( EE ) countries that joined the E uropean U nion ( EU ) in 2004. In line with other studies, we find that the market value of equity component in the F ama F rench (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 F ama F rench (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.