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Asset pricing and predictability of stock returns in the french market

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  • Ellouz, Siwar
  • Bellalah, Mondher
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    Abstract

    This paper studies the predictability of returns in the French stock market. It provides an analysis of predictable components of monthly common stock returns. We study a single-beta conditional model and we show that stock market risk premium is variable over the time and is important for capturing predictable variations of stock returns. We find also that the expected excess returns on small and medium capitalization stocks are more sensitive to changes in the predetermined variables such as dividend yields, default spread and term spread, than expected excess returns on large capitalization stocks.

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    File URL: http://mpra.ub.uni-muenchen.de/4961/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4961.

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    Date of creation: 07 Mar 2007
    Date of revision: 24 Sep 2007
    Handle: RePEc:pra:mprapa:4961

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    Keywords: predictability; predetermined variables; conditional asset pricing; stock returns;

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    2. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    3. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December.
    4. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    5. Bekaert, Geert, 2001. "Editor's foreword to the special issue: "On the predictability of asset returns"," Journal of Empirical Finance, Elsevier, vol. 8(5), pages 451-457, December.
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    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Wayne E. Ferson & Stephen R. Foerster & Donald B. Keim, . "Tests of Asset Pricing Models with Changing Expectations," Rodney L. White Center for Financial Research Working Papers 1-91, Wharton School Rodney L. White Center for Financial Research.
    9. Wayne E. Ferson & Campbell R. Harvey, 1996. "Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing," NBER Working Papers 5860, National Bureau of Economic Research, Inc.
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    14. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    15. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    16. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-64, December.
    17. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
    18. Dybvig, Philip H & Ross, Stephen A, 1985. " Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 383-99, June.
    19. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
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