Influential Article Review - Examining the Nature of German Stock Market Returns

Abstract

This paper examines the economy and investments. We present insights from a highly influential paper. Here are the highlights from this paper: The characteristics book-to-market equity ratio, size and momentum are highly correlated with the average returns of common stocks. Fama and French (J Financ Econ 33(1):3–56, 1993), (J Finance 50(1):131–155, 1995) and (J Finance 51(1):55–84, 1996) argue (for size and the book-to-market equity ratio) that the relation between returns and characteristics arises because the characteristics are proxies for exposures to common risk factors. We examine the question whether the characteristics or the covariance structure of returns explain the cross-sectional dispersion in German stock market returns. Our results suggest that widely accepted factors SMB, HML or WML are not priced. For our overseas readers, we then present the insights from this paper in Spanish, French, Portuguese, and German.