Size and Value Effects in the Visegrad Countries

The paper has two main objectives. The first is to test for the presence of the size and book-to-market value effects in the Visegrad countries. Such effects have been found in the United States and many other developed stock markets. The Visegrad countries consist of the Czech Republic, Hungary, Poland, and Slovakia. We demonstrate that size and value do in fact explain the expected return/cost of capital in Eastern Europe. Based on this result, we 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 regional three-factor model performs as well as country-specific versions of the model. However, it can be estimated for a more current sample in Prague, Warsaw, Budapest, and Bratislava. Therefore it is a plausible model for the cost of capital in this region and we use it to calculate the cost of capital for the following industries: banks; capital goods; food, beverage and tobacco; materials; and utilities