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Testing the Applicability of Fama-French Three Factors Model on the Bucharest Stock Exchange

Alexandra Horobet () and Violeta Duta ()
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Alexandra Horobet: Bucharest University of Economic Studies
Violeta Duta: Bucharest University of Economic Studies

PROCEEDINGS OF THE INTERNATIONAL CONFERENCE ON ECONOMICS AND SOCIAL SCIENCES, 2018, vol. 1, issue 1, 187-193

Abstract: This paper tests the relationship between the excess returns obtained by stocks traded on the Bucharest Stock Exchange and the market return, the capitalization (size) of the listed issuers,and the book-to-market ratio, in an attempt to identify the elements that influence these returns. The study aims to support the substantiation of those investment strategies that diminish (or sterilize) the exposure to certain dimensions of the risk involved in the investment on the stock exchange. The model we use is tested on six portfolios based on two criteria: size (capitalization) and value book-to-market) between 2011 and 2013. We identify the presence of all the three risk factors included in the Fama-French model, with a greater importance of the size factor, in agreement with the previous studies. Our results are relevant for individual and institutional investors on the Romanian stock exchange, that are able to build their strategies on size and value as investment factors, besides the systematic risk of the stocks. Keywords: Three-factor model, market premium, size premium, value premium, multiple linear regression

Date: 2018
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