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Cross-sectional Tests of Conditional Asset Pricing Models: Evidence from the German Stock Market

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  • Andreas Schrimpf
  • Michael Schröder
  • Richard Stehle

Abstract

"We study the performance of conditional asset pricing models and multifactor models in explaining the German cross-section of stock returns. We focus on several variables, which (according to previous research) are associated with market expectations on future market excess returns or business cycle conditions. Our results suggest that the empirical performance of the Capital Asset Pricing Model (CAPM) can be improved when allowing for time-varying parameters of the stochastic discount factor. A conditional CAPM using the term spread explains the returns on our size and book-to-market sorted portfolios about as well as the Fama-French three-factor model and performs best in terms of the Hansen-Jagannathan distance. Structural break tests do not necessarily indicate parameter instability of conditional model specifications. Another major finding of the paper is that the Fama-French model - despite its generally good cross-sectional performance - is subject to model instability. Unconditional models, however, do a better job than conditional ones at capturing time-series predictability of the test portfolio returns." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 13 (2007)
Issue (Month): 5 ()
Pages: 880-907

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Handle: RePEc:bla:eufman:v:13:y:2007:i:5:p:880-907

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Cited by:
  1. Artmann, Sabine & Finter, Philipp & Kempf, Alexander, 2010. "Determinants of expected stock returns: Large sample evidence from the German market," CFR Working Papers 10-01, University of Cologne, Centre for Financial Research (CFR).
  2. Hanauer, Matthias & Kaserer, Christoph & Rapp, Marc Steffen, 2011. "Risikofaktoren und Multifaktormodelle für den Deutschen Aktienmarkt (Risk Factors and Multi-Factor Models for the German Stock Market)," CEFS Working Paper Series 2011-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  3. Janick Christian Mollet & Andreas Ziegler, 2012. "Is Socially Responsible Investing Really Beneficial? New Empirical Evidence for the US and European Stock Markets," MAGKS Papers on Economics 201228, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Artmann, Sabine & Finter, Philipp & Kempf, Alexander & Koch, Stefan & Theissen, Erik, 2010. "The cross-Section of German stock returns: New data and new evidence," CFR Working Papers 10-12, University of Cologne, Centre for Financial Research (CFR).
  5. Javed Iqbal & Robert Brooks & Don U.A. Galagedera, 2008. "Testing Conditional Asset Pricing Models: An Emerging Market Perspective," Monash Econometrics and Business Statistics Working Papers 3/08, Monash University, Department of Econometrics and Business Statistics.
  6. Artmann, Sabine & Finter, Philipp & Kempf, Alexander, 2011. "Determinants of expected stock returns: Large sample evidence from the German market," CFR Working Papers 10-01 [rev.], University of Cologne, Centre for Financial Research (CFR).
  7. Lischewski, Judith & Voronkova, Svitlana, 2012. "Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?," Emerging Markets Review, Elsevier, vol. 13(1), pages 8-25.
  8. Wallmeier, Martin & Tauscher, Kathrin, 2012. "A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model," FSES Working Papers 433, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  9. Breig, Christoph & Elsas, Ralf, 2009. "Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System," Discussion Papers in Business Administration 10978, University of Munich, Munich School of Management.
  10. Ammann, Manuel & Frey, Roman & Verhofen, Michael, 2012. "Do Newspaper Articles Predict Aggregate Stock Returns?," Working Papers on Finance 1204, University of St. Gallen, School of Finance.
  11. Ziegler, Andreas & Busch, Timo & Hoffmann, Volker H., 2011. "Disclosed corporate responses to climate change and stock performance: An international empirical analysis," Energy Economics, Elsevier, vol. 33(6), pages 1283-1294.
  12. Benjamin R. Auer, 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(5), pages 518-544, September.
  13. Kodongo, Odongo & Ojah, Kalu, 2014. "The conditional pricing of currency and inflation risks in Africa's equity markets," MPRA Paper 56100, University Library of Munich, Germany.

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