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Equity Premium: - Does it exist? Evidence from Germany and United Kingdom

  • Michael E. Drew
  • Mirela Mallin
  • Tony Naughton
  • Madhu Veeraraghavan

Malkiel and Xu (1997) state that idiosyncratic volatility is highly correlated with size and that it plays a powerful role in explaining expected returns. In this paper we ask (a) whether idiosyncratic volatility is useful in explaining the variation in expected returns; and, (b) whether our findings can be explained by the turn of the year effect. We find that (a) our three-factor model provides a better description of expected returns than the CAPM. That is, we find that firm size and idiosyncratic volatility are related to security returns. In addition, we also find that our findings are robust throughout the sample period. We show that the CAPM beta alone is not sufficient to explain the variation in stock returns.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2004/DP%20No.%20170%20-%20Drew%20&%20Others.pdf
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Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 170.

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Date of creation: 15 Jan 2004
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Handle: RePEc:qut:dpaper:170
Contact details of provider: Postal: GPO Box 2434, BRISBANE QLD 4001
Web page: http://www.bus.qut.edu.au/faculty/economics/
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  13. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
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  17. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  18. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  19. Michael E. Drew & Mirela Malin & Tony Naughton & Madhu Veeraraghavan, 2006. "Idiosyncratic volatility and security returns: evidence from Germany and United Kingdom," Studies in Economics and Finance, Emerald Group Publishing, vol. 23(2), pages 80-93, June.
  20. 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.
  21. 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.
  22. Gultekin, Mustafa N. & Gultekin, N. Bulent, 1983. "Stock market seasonality : International Evidence," Journal of Financial Economics, Elsevier, vol. 12(4), pages 469-481, December.
  23. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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  25. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-55, March.
  26. Drew, Michael E. & Naughton, Tony & Veeraraghavan, Madhu, 2004. "Is idiosyncratic volatility priced?: Evidence from the Shanghai Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 349-366.
  27. Kahn, James A., 1990. "Moral hazard, imperfect risk-sharing, and the behavior of asset returns," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 27-44, August.
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