While applying Eugene Fama and Kenneth French methodology and using monthly time series data from July 1995 to June 2006, the parameters of three-factor model of excess returns for Warsaw Stock Exchange were estimated. Calculations confirmed the basie for this model assumption that the rate of return depends not only on the market (systematic) risk but also on the risk connected with the investments in stocks of smali firms and in stocks of underpriced by market firms with high ratio of book value to market value. Investors who risk to invest in smali firms and in underpriced by market companies can get higher rates of return than investors who buy the stocks of big, overpriced companies. Three-factor models, estimated for Warsaw Stock Exchange, are characterized by lower value of coefficient of determination in comparison with models estimated by Fama and French for New York stocks exchanges. This may result from several times lower number of companies used for the calculation of SMB and HML variables and the considerably shorter time series.
Financed by the National Centre for Research and Development under grant No. SP/I/1/77065/10 by the strategic scientific research and experimental development program:
SYNAT - “Interdisciplinary System for Interactive Scientific and Scientific-Technical Information”.