Has the Cross-Section of Average Returns Always Been the Same? Evidence from Germany, 1881-1913

Caltech Social Science Working Paper No. 1084

29 Pages Posted: 5 Apr 2001

See all articles by Peter Bossaerts

Peter Bossaerts

University of Melbourne - Department of Finance

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Date Written: July 2000

Abstract

The cross-section of average annual returns on German common stock in the period of 1881-1913 exhibits several of the patterns that have been observed in more recent U.S. data. Market beta is hardly important, and its explanatory power is swamped by size and the ratio of book value to market value. A book-to-market risk measure (covariance with a portfolio long in high book-to-market firms and short in low book-to-market firms) has no effect on the explanatory power of the book-to-market characteristic. But the size effect appears to be caused by selection bias in the sample. And the book-to-market effect is opposite that of the recent U.S. experience (and, hence, can certainly not be attributed to selection bias). Finally, a momentum portfolio constructed on the basis of the error of the basic 3-characteristic model (market beta, size and book-to-market) does not generate significant returns. These findings highlight the variability in the power of certain characteristics in explaining the cross section of average returns.

Keywords: Common stock returns, beta, momentum portfolio, selection bias

JEL Classification: G1, N2

Suggested Citation

Bossaerts, Peter L. and Fohlin, Caroline, Has the Cross-Section of Average Returns Always Been the Same? Evidence from Germany, 1881-1913 (July 2000). Caltech Social Science Working Paper No. 1084. Available at SSRN: https://ssrn.com/abstract=259282 or http://dx.doi.org/10.2139/ssrn.259282

Peter L. Bossaerts

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Caroline Fohlin (Contact Author)

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

HOME PAGE: http://https://scholar.google.com/citations?user=Ma08bxEAAAAJ&hl=en

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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