(Ab)Normal Returns in an Emerging Stock Market: International Investor Perspective

Abstract

This paper studies the comparative attractiveness of public equity investments in the Polish (emerging) and in the U.S. (advanced) stock markets in the years 2000–2013. Through an original implementation strategy based on one- and multi-factor asset pricing models, we find that the potential for abnormal profits is higher in the Polish stock market, specifically in conjunction with size and profitability anomalies. This result is persistent throughout all models and robustness checks. We evidence that the Fama–French five-factor model fares best in an international setting, yielding additional abnormal returns of 0.19 percentage point per month. Additionally, we show that an international investor should apply local, rather than global, risk factors to properly assess relative abnormal investment opportunities between markets.