An Application of Factor Pricing Models to the Polish Stock Market
Emerging Markets Finance and Trade, Volume 55, No. 9, Year 2019
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We evaluate and compare the performance of four popular factor pricing models: the capital asset pricing model, the Fama and French three-factor model, Carhart’s four-factor model, and the five-factor model of Fama and French. We aim to establish which of these models is most applicable in the Polish stock market. To do so, we employ a battery of tests—cross-sectional regressions, examination of one-way and two-way sorted portfolios, tests of monotonic relationships, and factor redundancy tests—and apply them to a sample of more than 1100 stocks for the years 2000–2018. The results indicate that the four-factor model outperforms the other models; it has the greatest explanatory ability for cross-sectional returns and is therefore well-suited for asset pricing in Poland.