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Modeling Portfolio Returns On Bucharest Stock Exchange Using The Fama-French Multifactor Model

Author

Listed:
  • Andrei ANGHEL

    (FABBV, Bucharest University of Economic Studies)

  • Dalina DUMITRESCU

    (FABBV, Bucharest University of Economic Studies)

  • Cristiana TUDOR

    (REI, Bucharest University of Economic Studies)

Abstract

The Fama–French three-factor model is known to explain the cross-section of average returns better than the market beta alone across various international equity markets. No such implementation exists, however, for the Romanian capital market. This paper contributes to the existing literature by calibrating the model on the Bucharest Stock Exchange and by relying on a complex, correct and complete database. We show that the three-factor model captures more variation in portfolio returns than the classical model (as attested by the higher adjusted R 2 ) while it also passes standard diagnosis tests (the hypothesis that pricing errors are jointly equal to 0 cannot be rejected by the GRS test statistics on the regressions intercepts). Robustness check demonstrates that the model is informative on seemingly unrelated time series; further, we also provide a simple application of performance attribution.

Suggested Citation

  • Andrei ANGHEL & Dalina DUMITRESCU & Cristiana TUDOR, 2015. "Modeling Portfolio Returns On Bucharest Stock Exchange Using The Fama-French Multifactor Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 22-46, March.
    • Handle: RePEc:rjr:romjef:v::y:2015:i:1:p:22-46
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    References listed on IDEAS

    as
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    2. Necula, Ciprian, 2009. "Modeling Heavy-Tailed Stock Index Returns Using the Generalized Hyperbolic Distribution," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 118-131, June.
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    4. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    5. Tudor, Cristiana, 2009. "Price Ratios and the Cross-section of Common Stock Returns on Bucharest Stock Exchange: Empirical Evidence," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 132-146, June.
    6. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
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    8. Acatrinei, Marius Cristian & Caraiani, Petre, 2011. "Modeling and Forecasting the Dynamics in Romanian Stock Market Indices Using Threshold Models," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 42-54, June.
    9. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, October.
    2. Güler ARAS & İlhan ÇAM & Bilal ZAVALSIZ & Serkan KESKİN, 2018. "Fama-French Çok Faktör Varlık Fiyatlama Modellerinin Performanslarının Karşılaştırılması: Borsa İstanbul Üzerine Bir Uygulama," Istanbul Business Research, Istanbul University Business School, vol. 47(2), pages 183-207, November.
    3. Adam ZAREMBA, 2015. "Low Risk Anomaly In The Cee Stock Markets," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 81-102, September.

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    More about this item

    Keywords

    Fama–French three-factor model; asset pricing; GRS test; Romanian equity market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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