Size and Value Effects in the Visegrad Countries

This paper has two main objectives. The first is to test for the presence of size and book-to-market value effects in the Visegrad countries (the Czech Republic, Hungary, Poland, and Slovakia). Such effects have been found in the U.S. stock market and in many other developed stock markets. The authors demonstrate that sizeand value do explain the expected return/cost of capital in eastern Europe. From this result they proceed by constructing regional size and book-to-market portfolios for a combined Visegrad market. Returns on these portfolios serve as factors in addition to the market portfolio. The second objective is constructing a model for the cost of capital. The regional three-factor model outperforms country-specific versions of the model, and it can be estimated for a more current sample in Prague, Budapest, Warsaw, and Bratislava. Therefore, it is a plausible model for the cost of capital in this region, and it is used to calculate the cost of capital for the following industries: banks; capital goods; food, beverage, and tobacco; materials; and utilities.