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The Alternative Three-Factor Model: Evidence from the German Stock Market

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Kiesel, F., Lübbering, A., Schiereck, D. The Alternative Three-Factor Model: Evidence from the German Stock Market. Credit and Capital Markets – Kredit und Kapital, 51(3), 389-420. https://doi.org/10.3790/ccm.51.3.389
Kiesel, Florian; Lübbering, Andreas and Schiereck, Dirk "The Alternative Three-Factor Model: Evidence from the German Stock Market" Credit and Capital Markets – Kredit und Kapital 51.3, 2018, 389-420. https://doi.org/10.3790/ccm.51.3.389
Kiesel, Florian/Lübbering, Andreas/Schiereck, Dirk (2018): The Alternative Three-Factor Model: Evidence from the German Stock Market, in: Credit and Capital Markets – Kredit und Kapital, vol. 51, iss. 3, 389-420, [online] https://doi.org/10.3790/ccm.51.3.389

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The Alternative Three-Factor Model: Evidence from the German Stock Market

Kiesel, Florian | Lübbering, Andreas | Schiereck, Dirk

Credit and Capital Markets – Kredit und Kapital, Vol. 51 (2018), Iss. 3 : pp. 389–420

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Dr. Florian Kiesel, Technische Universität Darmstadt, Hochschulstraße 1, 64289 Darmstadt

Andreas Lübbering, M.Sc., Technische Universität Darmstadt, Hochschulstraße 1, 64289 Darmstadt

Prof. Dr. Dirk Schiereck, Technische Universität Darmstadt, Hochschulstraße 1, 64289 Darmstadt

Abstract

This article applies the alternative three-factor model introduced by Chen / Novy-Marx / Zhang (2010) to the German stock market for the sample period of 2004 through 2015. We construct two new factors INV („investment") and ROA („return on assets") for companies listed on the highest segment of the Frankfurt Stock Exchange, and examine whether they can explain various stock market anomalies using linear time series regressions. Our results reveal that the theoretical assumptions of the model are valid for the German stock market. Firms with higher investments generally exhibit lower returns, while more profitable firms exhibit higher returns. However, we find that the alternative three-factor model does not explain capital market anomalies in the German market better than the factors of the traditional Fama / French (1993) three-factor model.