Conditional Asset Pricing and Stock Market Anomalies in Europe
41 Pages Posted: 8 Mar 2007 Last revised: 9 Jul 2008
Date Written: March 1, 2008
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.
Keywords: conditional asset pricing, time-varying risk, stock market anomalies
JEL Classification: G12, G14
Suggested Citation: Suggested Citation