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Test Of The Fama-French Three-Factor Model In Croatia

Author

Listed:
  • Dolinar, Denis

    (Faculty of Economics and Business, University of Zagreb, Croatia)

Abstract

This paper empirically examines the Fama-French three-factor model of stock returns for Croatia. In contrast to the results of Fama and French (1993) for the U.S. stock market, their three-factor model did not show so successful when describing risk-return relation of Croatian stocks. This paper shows that the Fama-French three-factor model is a valid pricing model, since it explains cross-section of average returns on stocks in Croatia, and that has a greater explanatory power in comparison to the CAPM. In the case of Croatian stock market, size and B/M factors are not always significant, but on average they individually have certain marginal explanatory power. Namely, they capture small common variation in returns that is missed by the market factor. Moreover, B/M factor has shown as a stronger common risk proxy in relation to size factor. Finally, there is still a large portion of common variation in stock return that may be explained by other factors. Because emerging capital markets bear their own specificity, special care needs to be taken when applying existing or developing new pricing models.

Suggested Citation

  • Dolinar, Denis, 2013. "Test Of The Fama-French Three-Factor Model In Croatia," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 4(2), pages 101-112.
    • Handle: RePEc:ris:utmsje:0072
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    Citations

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    Cited by:

    1. Jamil Chaya & Jamil A. Hammoud & Wael A. Saleh, 2021. "Stock Return Variations: The Validity of Systemic Risk, Size and Valuation as Explanatory Variables in the Lebanese Stock Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(3), pages 135-141, May.
    2. Asmâa ALAOUI TAIB & Safae BENFEDDOUL, 2023. "Explaining the time series of stock returns," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 14(2), pages 2-16, December.
    3. Dolinar Denis & Zoričić Davor & Golubić Zrinka Lovretin, 2019. "Application of semi-deviation as a proxy for the expected return estimation in the Croatian equity market," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 5(1), pages 9-20, May.

    More about this item

    Keywords

    Fama French; three factor model; systematic risk; asset pricing model; risk-return; Croatian stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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