Study of the leading European construction companies using risk factor models

Abstract

AbstractThis paper aims to study the potential effects of changes in international risk factors on leading European construction companies' returns. The study is conducted on a sample period between January 2000 and December 2019 and applies an extension of the Fama and French five‐factor model (2015) using the quantile regression methodology. Specifically, this research extends the Fama and French (2015) factor model by adding risk factors such as nominal interest rates, momentum and momentum reversal factors (Carhart, 1997) and the traded liquidity factor (Pastor and Stambaugh, 2003). For robustness, this study splits the entire sample period into three sub‐periods: pre‐crisis, crisis, and post‐crisis. As expected, the highest R2 coefficients are observed in the extreme quantiles, that is, in the bullish and bearish market states, revealing a U‐shaped relationship in the explanatory power of this factor model.