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Cross Sectional Analysis of the Swedish Stock Market

This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross-sectional variation in average stock returns on the Swedish stock market for the period 1980-1990. We correct for errors in variables problem of the estimated market beta. Since this method takes into account the measurement error we do not have to form portfolios and thereby losing information. We use both separate cross-sectional regressions and a pooled regression model to estimate the risk premiums of the different factors. An Extreme Bounds Analysis is utilised for testing the sensitivity of the estimated coefficients to changes in the set of the included explanatory variables. Since the tests are carried out on realised returns, which presumably are quite noisy approximations of expected returns, we study if beta can systematically explain cross-sectional differences among realised stock returns conditional on the sign of the realised market excess return. Our results show that the coefficient for beta is never significantly different from zero, but the estimates differ across the methods mentioned above. However, we find that beta is priced differently in periods with positive versus periods with negative realised market return. In the Extreme Bounds Analysis, the coefficient for the size variable is always significantly negative.

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File URL: http://project.nek.lu.se/publications/workpap/Papers/WP02_19.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2002:19.

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Length: 27 pages
Date of creation: 24 Oct 2002
Date of revision:
Handle: RePEc:hhs:lunewp:2002_019
Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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  1. Steven Heston & K. Rouwenhorst & Roberto Wessels, 2008. "The Role of Beta and Size in the Cross-Section of European Stock Returns," Yale School of Management Working Papers ysm86, Yale School of Management.
  2. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report 208, Federal Reserve Bank of Minneapolis.
  3. Dusan Isakov, 1999. "Is beta still alive? Conclusive evidence from the Swiss stock market," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 202-212.
  4. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc.
  5. Leamer, Edward E, 1983. "Let's Take the Con Out of Econometrics," American Economic Review, American Economic Association, vol. 73(1), pages 31-43, March.
  6. Pettengill, Glenn N. & Sundaram, Sridhar & Mathur, Ike, 1995. "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 101-116, March.
  7. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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