A Respecified Fama French Three‐Factor Model for the New European Union Member States

23 Pages Posted: 19 Mar 2013  

James Foye

University of Ljubljana

Dusan Mramor

University of Ljubljana - Faculty of Economics

Marko Pahor

University of Ljubljana - Faculty of Economics

Date Written: Spring 2013

Abstract

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.

Suggested Citation

Foye, James and Mramor, Dusan and Pahor, Marko, A Respecified Fama French Three‐Factor Model for the New European Union Member States (Spring 2013). Journal of International Financial Management & Accounting, Vol. 24, Issue 1, pp. 3-25, 2013. Available at SSRN: https://ssrn.com/abstract=2235454 or http://dx.doi.org/10.1111/jifm.12005

James Foye (Contact Author)

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

Dusan Mramor

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+386 1 589 2400 (Phone)
+386 1 589 2698 (Fax)

Marko Pahor

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+38615892629 (Phone)
+38615892698 (Fax)

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