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Common Risk Factors in Explaining Canadian Equity Returns

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Michael Berkowitz

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Abstract

This paper adopts the Fama and French (1993) methodology for determining the common risk factors in the returns of Canadian stocks. Our results suggest that the three stock market factors, the excess stock market returns, a size factor, and a book-to-market equity factor, explain most of the variation in Canadian equity returns over time. Unlike in the U.S. equity market, the addition of bond market variables provides little explanatory power in the Canadian equity market, suggesting that the underlying factors influencing stocks and bonds are more distinct in Canada. The stock and bond market factors are then used to estimate the required returns on a sample of Canadian utilities separated into telco, gas/electric and pipeline portfolios. The results presented in this paper suggest that the Fama and French model can make an important contribution to cost of capital determination in regulatory proceedings, especially when combined with estimates based upon alternative methodologies, to provide the regulator with additional insight in deciding the allowed return.

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File URL: http://repec.economics.utoronto.ca/files/UT-ECIPA-BERK-00-01.pdf
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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number berk-00-01.

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Length: 29 pages
Date of creation: 11 Dec 2001
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Handle: RePEc:tor:tecipa:berk-00-01

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Related research
Keywords: Equity returns; Factor loadings;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Daniel, Kent & Titman, Sheridan, 1997. " Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
  3. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July. [Downloadable!] (restricted)
  4. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March. [Downloadable!] (restricted)
  5. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andreas Ziegler & Michael Schröder & Klaus Rennings, 2007. "The effect of environmental and social performance on the stock performance of european corporations," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(4), pages 661-680, August. [Downloadable!] (restricted)
  2. Oberndorfer, Ulrich & Ziegler, Andreas, 2006. "Environmentally oriented energy policy and stock returns : an empirical analysis," ZEW Discussion Papers 06-79, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  3. Urs von Arx & Andreas Ziegler, 2008. "The Effect of CSR on Stock Performance: New Evidence for the USA and Europe," CER-ETH Economics working paper series 08/85, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  4. Rob Bauer & Jeroen Derwall & Rogér Otten, 2007. "The Ethical Mutual Fund Performance Debate: New Evidence from Canada," Journal of Business Ethics, Springer, vol. 70(2), pages 111-124, January. [Downloadable!] (restricted)
  5. Maher Kooli & Jean-François L'Her & Jean-Marc Suret, 2003. "Do IPOs Underperform in the Long-Run? New Evidence from the Canadian Stock Market," CIRANO Working Papers 2003s-16, CIRANO. [Downloadable!]
  6. Michael K. Berkowitz & Jiaping Qiu, 2001. "Ownership, Risk and Performance of Mutual Fund Management Companies," Working Papers berk-01-01, University of Toronto, Department of Economics. [Downloadable!]
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