THE (UN)CONDITIONAL RELATION RISK FACTORS MARKET, SIZE AND VALUE: EVIDENCE FROM FIVE EUROPEAN COUNTRIES

The main goal of this paper is to analyze the explanatory power of the risk factors, market, size and value, in a dataset of listed stocks in five European countries of the euro zone. We contribute to the literature by investigating whether the risk factors show a conditional behaviour according to the different economic market conditions. The results show that the three risk factors explain the excess returns of stock portfolios. However, there are some exceptions in relation to the size risk factor for stock portfolios of big companies and to the value risk factor for some stock portfolios. The explanatory power of the Fama and French (1993) model is clearly superior to that of the CAPM model. Our results for the conditional three factor model show the existence of a conditional relationship. The conditional model exhibits a higher explanatory power of stock excess returns compared to the unconditional model.