Panagiotis Artikis, Ph.D., Department of Business Administration, University of Piraeus, 80 Karaoli & Dimitriou Str., Piraeus, 18534, Greece
In the past years, in the finance literature internationally, there has been an increased attention to the Fama & French (1993) three-factor asset-pricing model (3FM) and its extended version the four-factor model proposed by Carhart (1997). According to these models asset returns can be attributed to four risk factors, namely the market premium, the value factor, the size factor and the momentum factor. In a seminal work in the area of asset pricing Liew and Vasalou (2000) showed, using data from ten countries, that the four risk factors can be linked to future Gross Domestic Product (GDP) growth.
The present study extends the work of Liew and Vasalou (2000) by focusing in a sample of companies from a small European stock market that has totally different characteristics from other mature stock markets. Specifically, the study examines whether there is a relationship between the behaviour of stock prices of Greek listed firms and future economic activity as measured by the GDP growth rate, for a time period from 1995 to 2008.
In order to further investigate whether the four risk factors can be leading indicators for future macroeconomic growth, the holdout sample of the Greek market is subsequently divided into two sub–samples depending on the economic activity (secondary or service sector) of the firms, resulting into three separate empirical tests. The methodology employed involves: a) univariate regressions of GDP growth on the lagged return to each of the individual risk factors (market premium, size, value and momentum), b) two factor regressions in order to compare each of the risk factors relative to the market risk premium, and c) a multi-factor regression that includes all risk factors side-by-side. We expect that the performance of the four risk factors (market premium, size, value and momentum) will be positively related to future economic growth for all regressions, by the whole sample and by sector of economic activity.