Testing Multi-Factor Asset Pricing Models in the Visegrad Countries

Abstract

There is no consensus in the literature as to which model should be used to estimate the stock returns and the cost of capital in the emerging markets. The Capital Asset Pricing Model (CAPM) that is most often used for this purpose in the developed markets has a poor empirical record and is likely not to hold in the less developed and less liquid emerging markets. Various factor models have been proposed to overcome the shortcomings of the CAPM. This paper examines both the CAPM and the macroeconomic factor models in terms of their ability to explain the average stock returns using the data from the Visegrad countries. We find, as expected, that the CAPM is not able to do this task. However, a four-factor model, including factors such as: excess market return, excess industrial production, excess inflation, and excess term structure, can in fact explain part of the variance in the Visegrad countries' stock returns.

Keywords: macroeconomic factor models, asset pricing, cost of capital, Poland

JEL Classification: G10, G 11, G12, G15, G31