Abstract:
The current study evaluates the performance of the Fama and French three-factor model
in a global setting with stocks selected from 15 European countries. We employed the multivariate
regression approach after sorting six portfolios according to size and book-to-
-market. The constituent stocks were selected to represent each country of our sample. In
order to homogenize the returns we used the spot exchange rates of non-euro-area countries
to convert prices into euros. Since we were analyzing on a global portfolio level we
used the MSCI EMU index as the proxy for the market portfolio. Daily returns were employed
for a period of five years from January 2002 to December 2006. The results were
not very encouraging for the three-factor model. Except for one portfolio, the three-factor
model failed to explain the variations in returns, and even in the single portfolio that
demonstrated size and value premiums, the market premium was insignificant. Our findings
are consistent with Griffin (2002), who suggested that the three-factor model is domestic
in nature and performs poorly for global portfolios.
