Testing Multi-Factor Asset Pricing Models in the Visegrad Countries

There is no consensus in the literature as to which model should be used to estimate stock returns and the cost of capital in the emerging markets. The Capital Asset Pricing Model (CAPM), which is most often used for this purpose in the developed markets, has a poor empirical record and is likely not to hold in the less developed and less liquid emerging markets. Various factor models have been proposed to overcome the shortcomings of the CAPM. This paper examines both the CAPM and macroeconomic factor models in terms of their ability to explain average stock returns using data from the Visegrad countries. We find, as expected, that the CAPM is not able to do this task. However, factor models, including factors such as the excess market return, industrial production, inflation, money, the exchange rate, exports, the commodity index, and the term structure, can in fact explain part of the variance in the Visegrad countries’ stock returns.