Fama & French model for value premium in the modern emerging markets

Abstract

The aim of the study is identification, evaluation and analysis of the value premium in the modern emerging markets using methodology proposing by Fama & French. The main objectives of the study: 1) To define value investing as an investment approach and find developed markets evidence for the value premium 2) To define emerging markets, their importance, growth and risk prospects for investing. 3) To estimate different explanations of value premium from the point of view both traditional and behavioral finance schools. 4) To make empirical analysis of value premium in selected emerging markets using the methodology of Fama&French. 5) Using results of empirical analysis define which explanation of value premium suits better: traditional or behavioral finance school. When looking at standard risk measures, such as standard deviation and beta; with our data, it does seem that value stocks are riskier than growth stocks. But using correlations, we observe that value investing is a safer strategy in downmarkets with lower correlations among country returns than those found with the growth strategy. When we look at the actual applicability and usability of standard risk measures such as standard deviation and beta in practice, we find that standard deviation does not differentiate between upside and downside potential. And that our value portfolios seem to have more upside potential than the growth portfolios. Furthermore, betas have not been sufficient in explaining stock markets risk in practice, although the CAPM seems appealing from a theoretical point-of-view. Therefore, traditional finance with its standard risk measures and rigid assumptions about market efficiency seems insufficient in explaining the value premium found in most stock markets in the world. Behavioral finance, on the other hand, offers some rather interesting insights.