MODELING PORTFOLIO RETURNS ON BUCHAREST STOCK EXCHANGE USING THE FAMA-FRENCH MULTIFACTOR MODEL

Andrei Anghel (), Dalina Dumitrescu () and Cristiana Tudor
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Andrei Anghel: FABBV, Bucharest University of Economic Studies
Dalina Dumitrescu: FABBV, Bucharest University of Economic Studies

Journal for Economic Forecasting, 2015, issue 1, 22-46

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.

Keywords: Fama–French three-factor model; asset pricing; GRS test; Romanian equity market (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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