Exact Factor Pricing in a European Framework

25 Pages Posted: 14 Jul 2000

See all articles by John Crombez

John Crombez

affiliation not provided to SSRN

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: Undated

Abstract

The empirical verification of the one-factor models or multi-factor models in asset pricing are an attempt to understand the risk factors that should be used by investors to value risky cash flows. In this paper we evaluate different model specifications for European stock market data. More specifically an exact factor pricing test is used to evaluate a one-factor model and multi-factor models on European country, sector and size portfolios. We find indications that European country portfolios are accurately described by a one-factor model while for the other portfolio groupings more factors seem to be required. The factor based on the momentum variable seems to be a better extension of the model than the factor based on book-to-market. All tests are done for the entire period available and three subperiods of different interest rate regimes. The multivariate tests indicate that the evaluation of the models is not the same for the different periods considered. The power of this evaluation is tested with a risk-based and a nonrisk-based alternative. The risk based alternative constructed by a different formulation of the market portfolio seems to give satisfactory power. For the nonrisk-based alternative the power is somewhat lower for European stock portfolios.

Keywords: Factor models, factor pricing tests

JEL Classification: C12, G12, G15

Suggested Citation

Crombez, John and Vander Vennet, Rudi, Exact Factor Pricing in a European Framework (Undated). Available at SSRN: https://ssrn.com/abstract=233549 or http://dx.doi.org/10.2139/ssrn.233549

John Crombez (Contact Author)

affiliation not provided to SSRN

Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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