Abstract
This study empirically analyzes and compares return data from developed and emerging market data based on the Fama French five-factor model and compares it to previous results from the Fama French three-factor model by Kostin, Runge and Adams (2021). It researches whether the addition of the profitability and investment pattern factors show superior results in the assessment of emerging markets during the COVID-19 pandemic compared to developed markets. We use panel data covering eight indices of developed and emerging countries as well as a selection of eight companies from these markets, covering a period from 2000 to 2020. Our findings suggest that emerging markets do not generally outperform developed markets. The results underscore the need to reconsider the assumption that adding more factors to regression models automatically yields results that are more reliable. Our study contributes to the extant literature by broadening this research area. It is the first study to compare the performance of the Fama French three-factor model and the Fama French five-factor model in the cost of equity calculation for developed and emerging countries during the COVID-19 pandemic and other crisis events of the past two decades.
Highlights
In the past decades, the economic world has been subject to several detrimental crises.The effects of these events were often disastrous and affected the involved markets on economic, political, and sociocultural levels
This study aims at providing empirical evidence of the validity of the Fama French five-factor model, challenging its applicability in a crisis setting such as the current COVID-19 pandemic
This study aims to compare previous findings from an earlier study of Kostin, Runge, and Adams [2] applying the Fama French three-factor model in emerging and developed markets with the application of the Fama French five-factor model in the same markets during the COVID-19 pandemic timeframe
Summary
The economic world has been subject to several detrimental crises The effects of these events were often disastrous and affected the involved markets on economic, political, and sociocultural levels. A majority of these events affected single countries and their bordering nations only, notably the Russian Financial Crisis from 1998 or the Icelandic Financial Crises between 2008 and 2010. Some of these crises, are so devastating in their underlying cause that they harmed whole markets worldwide instead of just a handful of affected countries. Crises of such a magnitude were the burst of the internet bubble 2001, the Global Financial Crisis (GFC, 2007–2008) that led to the Great
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