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Keywords:

  • asset pricing;
  • Europe;
  • ICAPM;
  • multifactor models;
  • risk factors

Abstract

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.