A Respecified Fama French Three Factor Model for the Eastern European Transition Nations

24 Pages Posted: 8 Mar 2016  

James Foye

University of Ljubljana

Dusan Mramor

University of Ljubljana - Faculty of Economics

Marko Pahor

University of Ljubljana - Faculty of Economics

Date Written: March 4, 2016

Abstract

This paper 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 better able to explain returns in the EE EU nations 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 Eastern European Transition Nations (March 4, 2016). Available at SSRN: https://ssrn.com/abstract=2742170 or http://dx.doi.org/10.2139/ssrn.2742170

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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