Beta and Returns Revisited: Evidence from the German Stock Market

Abstract

Traditional tests of the CAPM following the Fama / MacBeth (1973) procedure are tests of the joint hypotheses that there is a relationship between beta and realized return and that the market risk premium is positive. The conditional test procedure developed by Pettengill / Sundaram / Mathur (1995) allows to independently test the hypothesis of a relation between beta and realized returns. Monte Carlo simulations show that the conditional test reliably identifies this relation. In an empirical examination for the German stock market we find a significant relation between beta and return. Previous studies failed to identify this relationship probably because the average market risk premium in the sample period was close to zero. Our results provide a justification for the use of betas estimated from historical return data by portfolio managers. JEL classification: G12Keywords. Capital Asset Pricing Model, Market risk premium, Beta and return * We thank A. Craig MacKinlay, Jan P. Krahnen and seminar participants at the University of Frankfurt for valuable comments. a Johann Wolfgang Goethe-Universität Frankfurt/Main, Lehrstuhl für Kreditwirtschaft und Finanzierung, Mertonstr. 17-21 (PF 88),

Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System

“…This result is consistent with other studies on the German capital market (see for example Elsas, El-Shaer, and Theissen (2003)). As shown in Table 4, the realized market risk premium over the observation period is 0.293% per month with a standard deviation of 5.876%.…”

“…r M < r f ) is about 48% (r M denotes the market return and r f is the risk free rate). Under such conditions, the power of typical asset pricing test approaches is fairly low, see Elsas, El-Shaer, and Theissen (2003) and Pettengill, Sundaram, and Mathur (1995). Table 6 further shows that the estimates of the risk premia for SMB, HML and the default risk factor DEF are significantly different from zero.…”

Conditional risk–return relationship in a time-varying beta model

“…1 Many studies apply the PSM methodology to other markets. These include: Fletcher (1997Fletcher ( , 2000 and Hung et al (2004) for the UK market; Isakov (1999) for the Swiss market; Lam (2001) and Ho et al (2006) for the Hong Kong market; Elsas et al (2003) for the German market; Hodoshima et al (2000) for the Japanese market; Faff (2001) for the Australian market; and Sandoval and Saens (2004) for four Latin American markets. The overwhelming preponderance of these studies supports the PSM conclusion.…”

Parameters that Provide Higher Explanation Estimating Betas in the Portuguese Stock Market¹

“…The index representing the market, the time period or the frequency used will result in different values for the Beta. Many have been the studies undertaken to demonstrate that the actual estimation of this parameter according to the CAPM is not the best solution, including Elsas et al (2003) Fernández & Carabias (2007), Fernández (2008a2008b), Fernández (2009a2009b).…”