We thank Aljoša Valentinčič and two anonymous referees from the European Finance Association conference in Copenhagen for their helpful comments.
A Respecified Fama French Three-Factor Model for the New European Union Member States
Article first published online: 17 MAR 2013
© 2013 Blackwell Publishing Ltd
Journal of International Financial Management & Accounting
Volume 24, Issue 1, pages 3–25, Spring 2013
How to Cite
Foye, J., Mramor, D. and Pahor, M. (2013), A Respecified Fama French Three-Factor Model for the New European Union Member States. Journal of International Financial Management & Accounting, 24: 3–25. doi: 10.1111/jifm.12005
- Issue published online: 17 MAR 2013
- Article first published online: 17 MAR 2013
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.