The four-factor asset pricing model on the Polish stock market

Abstract

In the three-factor asset pricing model a cross sectional portfolio returns variation is explained by the excess return of the market portfolio (RM), stock capitalisation and a factor associated with the book-to-market (B/M) ratio. This model, however, does not explain the momentum effect. Since this effect is present on many stock markets, the three-factor model is augmented by the momentum factor. This article presents the study of the four-factor asset pricing model on the Warsaw Stock Exchange (WSE) which is one of the largest stock markets in Central and Eastern Europe. The empirical analysis is based on monthly data from the period April 2003–December 2012 which includes different stages of the business cycle. This article shows that momentum is a significant factor on the WSE and the four-factor model describes the returns variation much better than the three-factor model.