The Explanatory Power of Firm-specific Factors on Danish Stock Returns

Anne Haumann

Student thesis: Master thesis


The purpose of this project is to investigate how well different firm specific factors explain the return on Danish stocks, and which factor-model that does the best job explaining the returns. I have tested 11 different factors, which are made as mimicking portfolios, and the investigation is done with the Fama & Frenchs time series approach. The factors, that I have tested, are related to: • Market return • Size • Book-to-Market values • Earning-to-Price values • Dividend-to-Price value • Cash-Flow-to-Price values • Historic Return/Momentum • Profitability • Investment • ROIC • Leverage-ratio Every factor is evaluated on estimates, significance and essential explanatory ability, and the investigation is set up as hypothesis testing. In the project I have found that: • The hypothesis regarding the Market and the factors related to Size, Book-to-Market and ROIC are accepted. All those factors show the expected tendencies in a satisfactory way. Most estimates are significantly different than zero, and the factors play a substantial role for the empirically derived models. Besides that, the Fama & French 3-factor model with three of the four mentioned factors, Market-, Size and Book-to-Market-factor appear to be the highest ranked model of all models tested. Of the four factors, the Market factor performs the best, when explaining the Danish stock return alone. • The hypotheses regarding the remaining factors are not accepted. Generally, the problems are that the factors are not significant in models with multiple factors, and the factors are not essential when explaining the return. • The role of the factors related to Profitability, Investment and Momentum seem to be under evaluated, and the ROIC-factor to be over evaluated, when the Danish stocks are compared to Swedish stocks as benchmark. • The validity of the investigation is primarily challenged by the data basis being very small with especially the amount of Danish stocks being limited. Other criticism of validity is in relation to the quality of data, uncertainty about the statistic presumptions being satisfied and the significant consequences of choice made to perform the investigation.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages80