IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v29y2010i7p1406-1423.html
   My bibliography  Save this article

Cashflow news, the value premium and an asset pricing view on European stock market integration

Author

Listed:
  • Nitschka, Thomas

Abstract

The decomposition of national CAPM market betas of European countries' value and growth portfolio returns into cashflow and discount rate news driven components reveals that i) high average returns on value portfolios are associated with disproportionately high sensitivity to national cashflow news which corroborates recent evidence for the U.S. and ii) two-beta variants of national CAPMs capture the cross-sectional dispersion in European stock returns. The latter finding is suggestive of relatively well integrated stock markets among the core European countries and reflects basic asset pricing theory. One (national) discount factor should price any (international) asset.

Suggested Citation

  • Nitschka, Thomas, 2010. "Cashflow news, the value premium and an asset pricing view on European stock market integration," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1406-1423, November.
    • Handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1406-1423
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261-5606(10)00057-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eugene F. Fama & Kenneth R. French, 1998. "Value versus Growth: The International Evidence," Journal of Finance, American Finance Association, vol. 53(6), pages 1975-1999, December.
    2. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    3. Hamburg, Britta & Hoffmann, Mathias & Keller, Joachim, 2005. "Consumption, wealth and business cycles: why is Germany different?," Discussion Paper Series 1: Economic Studies 2005,16, Deutsche Bundesbank.
    4. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
    5. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2008. "Consumption, wealth and business cycles in Germany," Empirical Economics, Springer, vol. 34(3), pages 451-476, June.
    6. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    7. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    8. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    9. Campbell, John Y & Hamao, Yasushi, 1992. "Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," Journal of Finance, American Finance Association, vol. 47(1), pages 43-69, March.
    10. Martin Lettau & Sydney Ludvigson, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, June.
    11. Hui Guo, 2006. "The Risk‐Return Relation in International Stock Markets," The Financial Review, Eastern Finance Association, vol. 41(4), pages 565-587, November.
    12. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    13. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
    14. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-676, July.
    15. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
    16. 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.
    17. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    18. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    19. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    20. Mathias Hoffmann, 2005. "Proprietary Income, Entrepreneurial Risk and the Predictability of U.S. Stock Returns," Computing in Economics and Finance 2005 229, Society for Computational Economics.
    21. De Santis, Giorgio & Gerard, Bruno, 1997. "International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
    22. 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 1739-1764, December.
    23. Solnik, B H, 1974. "The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure," Journal of Finance, American Finance Association, vol. 29(2), pages 365-378, May.
    24. Liu, Naiping & Zhang, Lu, 2008. "Is the value spread a useful predictor of returns?," Journal of Financial Markets, Elsevier, vol. 11(3), pages 199-227, August.
    25. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    26. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    27. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    28. Ioannidis, C. & Peel, D.A. & Matthews, K.P.G., 2006. "Expected stock returns, aggregate consumption and wealth: Some further empirical evidence," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 439-445, June.
    29. Lance A. Fisher & Graham M. Voss, 2004. "Consumption, Wealth and Expected Stock Returns in Australia," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 359-372, December.
    30. Nitschka Thomas, 2010. "International Evidence for Return Predictability and the Implications for Long-Run Covariation of the G7 Stock Markets," German Economic Review, De Gruyter, vol. 11(4), pages 527-544, December.
    31. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    32. Alvin Tan & Graham Voss, 2003. "Consumption and Wealth in Australia," The Economic Record, The Economic Society of Australia, vol. 79(244), pages 39-56, March.
    33. 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.
    34. 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.
    35. Emilio Fernandez-Corugedo & Simon Price & Andrew Blake, 2003. "The dynamics of consumers' expenditure: the UK consumption ECM redux," Bank of England working papers 204, Bank of England.
    36. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    37. Harvey, Campbell R, 1991. "The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-157, March.
    38. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "The International Equity Holdings of Euro Area Investors," The Institute for International Integration Studies Discussion Paper Series iiisdp104, IIIS.
    39. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dr. Thomas Nitschka, 2014. "Have investors been looking for exposure to specific countries since the global financial crisis? - Insights from the Swiss franc bond market," Working Papers 2014-13, Swiss National Bank.
    2. David Haab & Dr. Thomas Nitschka, 2017. "Predicting returns on asset markets of a small, open economy and the influence of global risks," Working Papers 2017-14, Swiss National Bank.
    3. Thomas Nitschka, 2016. "Is There a Too-Big-to-Fail Discount in Excess Returns on German Banks’ Stocks?," International Finance, Wiley Blackwell, vol. 19(3), pages 292-310, December.
    4. David R. Haab & Thomas Nitschka, 2019. "What Goliaths and Davids among Swiss firms tell us about expected returns on Swiss asset markets," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-17, December.
    5. Galsband, Victoria, 2012. "Downside risk of international stock returns," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2379-2388.
    6. Maurer, Tim D. & Nitschka, Thomas, 2023. "Stock market evidence on the international transmission channels of US monetary policy surprises," Journal of International Money and Finance, Elsevier, vol. 136(C).
    7. Victoria Atanasov & Thomas Nitschka, 2013. "The Size Effect in Value and Momentum Factors: Implications for the Cross-section of International Stock Returns," Tinbergen Institute Discussion Papers 13-180/IV/DSF66, Tinbergen Institute.
    8. Yamani, Ehab A. & Swanson, Peggy E., 2014. "Financial crises and the global value premium: Revisiting Fama and French," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 115-136.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
    2. Auer Benjamin R., 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren? / Can Time-varying Parameter Specification Based on Consumption Variables Rehabilitate CAPM, ," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(5), pages 518-544, October.
    3. Della Corte, Pasquale & Sarno, Lucio & Valente, Giorgio, 2010. "A century of equity premium predictability and the consumption-wealth ratio: An international perspective," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 313-331, June.
    4. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    5. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    6. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    7. Khan, Mozaffar, 2008. "Are accruals mispriced Evidence from tests of an Intertemporal Capital Asset Pricing Model," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 55-77, March.
    8. Maio, Paulo & Philip, Dennis, 2018. "Economic activity and momentum profits: Further evidence," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 466-482.
    9. Stefano Gubellini, 2014. "Conditioning information and cross-sectional anomalies," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 529-569, October.
    10. Campbell, John Y. & Giglio, Stefano & Polk, Christopher & Turley, Robert, 2018. "An intertemporal CAPM with stochastic volatility," Journal of Financial Economics, Elsevier, vol. 128(2), pages 207-233.
    11. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2010. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 305-344, January.
    12. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    13. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    14. Maio, Paulo, 2016. "Cross-sectional return dispersion and the equity premium," Journal of Financial Markets, Elsevier, vol. 29(C), pages 87-109.
    15. Bai, Jennie & Bali, Turan G. & Wen, Quan, 2021. "Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1017-1037.
    16. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887, Elsevier.
    17. Maio, Paulo, 2013. "Return decomposition and the Intertemporal CAPM," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4958-4972.
    18. Boons, M.F., 2014. "Sorting out commodity and macroeconomic risk in expected stock returns," Other publications TiSEM 1ebdac58-bf37-499d-8835-1, Tilburg University, School of Economics and Management.
    19. Jang, Jeewon & Kang, Jangkoo, 2017. "An intertemporal CAPM with higher-order moments," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 314-337.
    20. Ilan Cooper & Paulo Maio, 2019. "Asset Growth, Profitability, and Investment Opportunities," Management Science, INFORMS, vol. 65(9), pages 3988-4010, September.

    More about this item

    Keywords

    Cashflow beta Discount rate beta CAPM Value premium;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1406-1423. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.