Covariances vs. characteristics: what does explain the cross section of the German stock market returns?

The characteristics book-to-market equity ratio, size and momentum are highly correlated with the average returns of common stocks. Fama and French (J Financ Econ 33(1):3-56, 1993), (J Finance 50(1):131-155, 1995) and (J Finance 51(1):55-84, 1996) argue (for size and the book-to-market equity ratio)...

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Bibliographic Details
Published in:Business Research 2016-04, Vol.9 (1), p.27-50
Main Authors: Fieberg, Christian, Varmaz, Armin, Poddig, Thorsten
Format: Article
Language:English
Subjects:
Accounting/Auditing
Asset pricing
Business and Management
Business Strategy/Leadership
Capital assets
Characteristics model
Corporate Finance
Equity
German stock market returns
Hypotheses
Investments
Marketing
Original Research
Rates of return
Risk factor model
Risk factors
Securities markets
Stock exchanges
Stock market anomalies
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Summary:The characteristics book-to-market equity ratio, size and momentum are highly correlated with the average returns of common stocks. Fama and French (J Financ Econ 33(1):3-56, 1993), (J Finance 50(1):131-155, 1995) and (J Finance 51(1):55-84, 1996) argue (for size and the book-to-market equity ratio) that the relation between returns and characteristics arises because the characteristics are proxies for exposures to common risk factors. We examine the question whether the characteristics or the covariance structure of returns explain the cross-sectional dispersion in German stock market returns. Our results suggest that widely accepted factors SMB, HML or WML are not priced.
ISSN:2198-2627
2198-3402
1866-8658
2198-2627
DOI:10.1007/s40685-016-0029-4