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The Role of Beta and Size in the Cross-Section of European Stock Returns

  • Steven Heston
  • K. Rouwenhorst
  • Roberto Wessels

This paper examines the ability of beta and size to explain cross-sectional variation in average returns in twelve European countries. We find that average stock returns are positively related to beta and negatively related to firm size. The beta premium is in part due to the fact that high beta countries outperform low beta countries. Within countries high beta stocks outperform low beta stocks only in January, not in other months. We reject the hypothesis that differences in average returns on size- and beta-sorted portfolios can be explained by market risk and exposure to the excess return of small over large stocks (SMB). Consistent with recent U.S. evidence, we find that after controlling for size, there is no association between average returns and exposure to SMB.

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File URL: http://icfpub.som.yale.edu/publications/2645
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm86.

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Date of creation: 01 Jul 2008
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Handle: RePEc:ysm:somwrk:ysm86
Contact details of provider: Web page: http://icf.som.yale.edu/

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