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

37 Pages Posted: 5 Jul 2008

See all articles by Steven L. Heston

Steven L. Heston

University of Maryland - Department of Finance

Roberto E. Wessels

University of Groningen - Faculty of Economics and Business

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Abstract

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.

Keywords: European equity markets, CAPM, 3-factor model

JEL Classification: G15, G11, G12

Suggested Citation

Heston, Steven L. and Wessels, Roberto E. and Rouwenhorst, K. Geert, The Role of Beta and Size in the Cross-Section of European Stock Returns. European Financial Management Vol 4, pp. 9-28, 1999. Available at SSRN: https://ssrn.com/abstract=73354

Steven L. Heston

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Roberto E. Wessels

University of Groningen - Faculty of Economics and Business ( email )

+31-50-3633633685 (Phone)

HOME PAGE: http://www.rug.nl

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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