Conditional Asset Pricing and Stock Market Anomalies in Europe

Authors


  • We are grateful to an anonymous referee, John Doukas (the editor), Rik Frehen, Roy Hoevenaars, Robert Korajczyk, Zhan Onayev (the EFMA discussant), Jean-Pierre Urbain and seminar participants at Maastricht University, Robeco Asset Management, and the 2007 EFMA Meetings in Vienna, for helpful comments. Correspondence: Mathijs Cosemans.

Abstract

This study provides European evidence on the ability of static and dynamic specifications of the Fama-French (1993) three-factor model to price 25 size-B/M portfolios. In contrast to US evidence, we detect a small-growth premium and find that the size effect is still present in Europe. Furthermore, we document strong time variation in factor risk loadings. Incorporating these risk fluctuations in conditional specifications of the three-factor model clearly improves its ability to explain time variation in expected returns. However, the model still fails to completely capture cross-sectional variation in returns as it is unable to explain the momentum effect.

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