Fama French Five-factor Model Testing in Europe

Ioannis Panagiotakopoulos & Vasileia Stavrakaki

Student thesis: Master thesis


Even though it is considered by many as a fragmented market, including different cultures and economy levels, European Union is still an attractive destination for investors. Throughout its history, EU has been gradually achieving high degrees of integration both in a political and an economic level so that it can be studied as a whole. The investors take that seriously into account. The European Union offers plenty of investment opportunities. Being the area with the highest Gross Domestic Product in the world, highly entrepreneurial and its economy on rebound after the global financial crisis, it has the capacity to bounce back to high returns. To this end, this study argues on the investment opportunities EU has to offer. However, when deciding to invest in a market, one would need the right tools to do so. Therefore, the relevant asset pricing models should be employed in order to serve that goal. Such models aim to explain the variations of average returns and thus, aid potential investors to take the relevant investment decisions that suit them. Academic literature is lacking of an empirical study that aims to explain the expected returns of portfolios formed by combining firms from all over the European Union. By using different combinations of Fama French three-, four- and five- factor model, this study works in the direction of filling that gap. In general, the current empirical analysis shows that highly profitable and aggressive, in terms of investment, firms outperform the less profitable and less aggressive ones. The analysis employs the relevant asset pricing models in the EU and the two largest markets of France and the UK. However, this study proves that the choice between the different models is dependent on various portfolio and country choices.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages102