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European Indexes and the Four-Factor Model

Bruce A. Costa, Keith Jakob and Lee Tangedahl
The Journal of Beta Investment Strategies Summer 2014, 4 (1) 82-89; DOI: https://doi.org/10.3905/jii.2013.4.1.082
Bruce A. Costa
is a professor of finance in the School of Business Administration at the University of Montana in Missoula, MT.
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  • For correspondence: bruce.costa@umontana.edu
Keith Jakob
is the Donald & Carol Jean Byrnes Professor of Finance in the School of Business Administration at the University of Montana in Missoula, MT.
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  • For correspondence: keith.jakob@umontana.edu
Lee Tangedahl
is a professor of information systems in the School of Business Administration at the University of Montana in Missoula, MT.
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  • For correspondence: lee.tangedahl@umontana.edu
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Abstract

Using a four-factor model and newly available European risk factors, we generate alphas and factor loadings for a set of European stock market indexes. Indexes are essentially unmanaged portfolios, therefore their alphas should be insignificant. Since unmanaged indexes do not follow any particular momentum strategy, factor loadings for the momentum factor should also be insignificant. Earlier academic research shows that many U.S. indexes have significant alphas and factor loadings. In this study we report significant alphas and many significant factor loadings on the momentum factor for European indexes. We also find that the four-factor model with European data has lower explanatory power, and the factor loadings for European indexes differ dramatically from the factor loadings for U.S. indexes. Our findings indicate that a European fund’s alpha and risk factor loadings must be systematically adjusted relative to its benchmark index.

TOPICS: Passive strategies, developed, factor-based models

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The Journal of Index Investing: 4 (1)
The Journal of Beta Investment Strategies
Vol. 4, Issue 1
Summer 2014
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European Indexes and the Four-Factor Model
Bruce A. Costa, Keith Jakob, Lee Tangedahl
The Journal of Beta Investment Strategies May 2013, 4 (1) 82-89; DOI: 10.3905/jii.2013.4.1.082

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European Indexes and the Four-Factor Model
Bruce A. Costa, Keith Jakob, Lee Tangedahl
The Journal of Beta Investment Strategies May 2013, 4 (1) 82-89; DOI: 10.3905/jii.2013.4.1.082
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