Study of the leading European construction companies using risk factor models

Abstract

This paper aims to study the potential effects of changes in international risk factors on leading European construction companies' returns. The study is conducted on a sample period between January 2000 and December 2019 and applies an extension of the Fama and French five‐factor model (2015) using the quantile regression methodology. Specifically, this research extends the Fama and French (2015) factor model by adding risk factors such as nominal interest rates, momentum and momentum reversal factors (Carhart, 1997) and the traded liquidity factor (Pastor and Stambaugh, 2003). For robustness, this study splits the entire sample period into three sub‐periods: pre‐crisis, crisis, and post‐crisis. As expected, the highest R2 coefficients are observed in the extreme quantiles, that is, in the bullish and bearish market states, revealing a U‐shaped relationship in the explanatory power of this factor model.

Government Bonds and COVID-19. An International Evaluation Under Different Market States

“…In our case, it was decided to analyse the sensitivity shown by bond yields in three specific quantiles: 0.1 (lower end of the distribution), 0.5 (median of the distribution) and 0.9 (upper end of the yield distribution) to observe what happens beyond the median, that is, at more extreme values, as this is one of the advantages of using the QR method. The selected theta values are in line with recent studies such as Jareño et al (2022) and Escribano et al (2022) , among others. It also allows for the evaluation by linear programming and the use of monotonic transformations in the returns of the countries’ bonds, in addition to offering more robust results, which enriches the interpretation of the results obtained.…”

“…Previous works, such as Ferrando et al (2017) , Sevillano and Jareño (2018) , Jareño et al (2020 , 2021) and Escribano et al (2022) among many others, have been used as a reference for the estimation and interpretation of this model by means of QR.…”

“…Numerous recent studies, including Escribano et al, 2022 ; González & Jareño, 2019 ; Jareño et al, 2016 , 2020 , 2022 ; Sevillano & Jareño, 2018 , among others, have conducted their analyses through the application of the QR method to estimate the models proposed in their research. This method offers multiple advantages, such as obtaining changes produced in parameters in many quantiles, evaluating linear programming, using monotonic transformations and showing more reliable results of the variable in the presence of outliers.…”

“…Specifically, Figure 2 shows the evolution of the sensitivity of bond yields to changes in the risk factors (in blue) for the different quantiles. Thus, the extreme quantiles are associated with the bullish and bearish situations of the bond market, as described in the works of Sevillano and Jareño (2018) , Jareño et al (2020 , 2021) and Escribano et al (2022) , among others.…”

How Well has Fama-French Five-Factor Model Explained Asset Returns? - A Systematic Literature Review

“…Singh et al (2022) finds that investment factor has no explanatory power in the presence of profitability factor in the sample of Chinese and Indian stock market, despite the significant predictive power of profitability and investment factors in the Fama and French five-factor model. The mixed finding on the performance of the model is also documented in (Escribano et al, 2022).…”