Predictability and the Cross-Section of Expected Returns: Evidence from the European Stock Market

43 Pages Posted: 19 Aug 2019 Last revised: 1 Jul 2020

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Rebekka Haller

University of Hamburg

Christian Jasperneite

M.M. Warburg & Co

Tizian Otto

University of Hamburg

Date Written: August 10, 2019

Abstract

This paper examines the cross-sectional properties of stock return forecasts based on Fama-MacBeth regressions using all firms contained in the STOXX Europe 600 index during the September 1999-December 2018 period. Our estimation approach is strictly out-of-sample, mimicking an investor who exploits both historical and real-time information on multiple firm characteristics to predict returns. The models capture a substantial amount of the cross-sectional variation in true expected returns and generate predictive slopes close to one, i.e., the forecast dispersion mostly reflects cross-sectional variation in true expected returns. The predictions translate into a high value added for investors. For an active trading strategy, we find strong market outperformance net of transaction costs based on a variety of performance measures.

Keywords: characteristics-based asset pricing, factor timing, active trading strategy

JEL Classification: G11, G12, G14, G17

Suggested Citation

Drobetz, Wolfgang and Haller, Rebekka and Jasperneite, Christian and Otto, Tizian, Predictability and the Cross-Section of Expected Returns: Evidence from the European Stock Market (August 10, 2019). Available at SSRN: https://ssrn.com/abstract=3436051 or http://dx.doi.org/10.2139/ssrn.3436051

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Rebekka Haller

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Christian Jasperneite

M.M. Warburg & Co

FerdinandstraƟe 75
Hamburg, 20095

Tizian Otto (Contact Author)

University of Hamburg ( email )

MoorweidenstraƟe 18
Hamburg, 20148
Germany

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