Book-to-market equity and size as determinants of returns: evidence from the Tunisian stock exchange

Little, if any, has been published on the robustness of the Fama & French multi-factor model in emerging and little markets, such as the Tunisian Stocks’ market. This paper extends the existing literature and provides an out-of sample check on the performance of size and BE/ME factors proposed by Fama & French (1993). It firstly investigates the relation of stock returns with size and BE/ME ratio for equities listed in the Tunisian Stocks ‘market during the period July 1998-June 2004.The evidence we find support the presence of size and BE/ME effects in the Tunisian stocks’ market. We find that the mimic portfolio for size (SMB) and the mimic portfolio for BE/ME generate positive returns, which is consistent with a risk-based explanation for size and BE/ME effect. The second purpose of this paper is to examine the explanatory power of the three-factor model of Fama & French (1993) in the Tunisian stocks ‘market. We estimate a one factor model (CAPM) and the three-factor model of Fama & French (1993). The results give evidence on the additional explanatory power of SMB and HML factors of Fama & French, relative to the market factor, for cross-section of stock returns in the Tunisian Stocks’ market. Findings of this paper have implications for investors in the Tunisian stock market exchange. We suggest that investors must tilt their portfolios in favor of characteristics such as firm's BE/ME and size. Note that by tilting portfolios in favor of these characteristics investors are exposed to additional sources of risk.