Digesting Anomalies in Emerging European Markets: A Comparison of Factor Pricing Models

Abstract

This study compares the performance of four popular factor pricing models—the capital asset-pricing model (Sharpe, 1964), the three-factor model of Fama and French (1993), the four-factor model of Carhart (1997), and the five-factor model of Fama and French (2015a)—testing their explanatory power over a broad range of cross-sectional return patterns in emerging European markets. We identify, classify, and replicate 100 anomalies documented in the financial literature. Only 20 (32) of the capitalization-weighted (equal-weighted) anomaly portfolios are significantly profitable. We show that the five-factor model best explains the returns of anomaly portfolios and verify its superiority over the other models.

Keywords: asset pricing, factor models, anomalies, emerging European markets, emerging markets, cross section of returns, size, value, momentum, profitability, asset growth

JEL Classification: G11, G12, G14