How Domestic is the Fama and French Three-Factor Model? An Application to the Euro Area

Gerard Moerman

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: The euro area has faced a high number of monetary and policy changes in the recent past as a consequence of the European integration process and, naturally, these developments have important implications for portfolio diversification and asset pricing. Therefore, this paper concentrates on the performance of a specific asset pricing model: the Fama and French threefactor model. Griffin (2002) shows that the Fama and French factors are country specific for the U.S., the U.K, Canada, and Japan. We apply the same methodology to the euro area countries and find that even in this very integrated area the domestic three-factor model outperforms the euro area three-factor model. However, the relative performance of the euro area wide model is increasing, especially for countries with a high number of listed stocks. This could be interpreted as evidence of a higher level of equity market integration caused by lower investment barriers and a changing point of view of institutional investors. Furthermore, we extend the methodology and also test an industry-specific three-factor model. Our findings suggest that lower pricing can be acquired using an industry-specific model relative to the euro area three-factor model.

Keywords: European integration; Fama-French factors; asset pricing; euro area stock; industry factor model (search for similar items in EconPapers)
JEL-codes: F36 G11 G12 G20 G3 M (search for similar items in EconPapers)
Date: 2005-06-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://repub.eur.nl/pub/6626/ERS%202005%20035%20F&A.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:6626

Access Statistics for this paper

More papers in ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam Contact information at EDIRC.
Bibliographic data for series maintained by RePub (peter.vanhuisstede@eur.nl this e-mail address is bad, please contact repec@repec.org).