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Eric MOLAY eric.molay@unice.fr CEROG – IAE Aix en Provence Risk & Asset Management – EDHEC Nice

Eric MOLAY eric.molay@unice.fr CEROG – IAE Aix en Provence Risk & Asset Management – EDHEC Nice. The Cross-Section of the Expected Stock Returns at the Paris Stock Exchange. CAPM empirical validation ?. Positive linear relation : returns  b Cross-sectional returns anomalies :

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Eric MOLAY eric.molay@unice.fr CEROG – IAE Aix en Provence Risk & Asset Management – EDHEC Nice

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  1. Eric MOLAYeric.molay@unice.frCEROG – IAE Aix en ProvenceRisk & Asset Management – EDHEC Nice The Cross-Section of the Expected Stock Returns at the Paris Stock Exchange

  2. CAPM empirical validation ? • Positive linear relation : returns  b • Cross-sectional returns anomalies : • Market value : RMV- > RMV+ • Book-to-market ratio : RBM+ > RBM- • No significant relation : returns  b • CAPM  three-factor model ?

  3. Empirical analysis critics • Three-factor model  APT • Data mining, selection and survivor bias • Investors psychology • Errors-in-variables problem (EIV)

  4. Errors in variables problem • Relation between expected returns and beta : • Time series estimates of b : • Cross-sectional estimates of the relation between expected returns andb : • Are the cross-sectional coefficient estimates significant ?

  5. Aim of this study • Cross-sectional analysis on the French market • Use of Fama et French 92 methodology • Relationship : • Expected stock returns  b • Expected stock returns  market value and book-to-market ratio • Expected stock returns  s et h (three-factor model FF 93) • Do correction tothe Fama-MacBeth t-statistics

  6. Database • Datastream International™ • Stocks returns at the Paris SE (mean : 250 ) • 120 months time series : July 88  June 98 • Arithmetic returns adjusted: • Dividend payments • Capital changes

  7. Independent variables • Specific factors : • Market value : MV = P x N • Book-to-market ratio : BV/MV = NTA/MV • "Risk premiums"  coefficients : • CAPM b • Fama et French three-factor model (FF 93) : • SMB (Small Minus Big) s • HML (High Minus Low) h

  8. Expected returns b • Time-series estimates of the b over 30 months: • Cross-sectional estimates : expected returns b : • Fama-MacBeth t-statistics corrections : • EIV correction (Shanken 92) • GLSestimates (Ferson and Harvey 99)

  9. Expected returns b

  10. Expected returns b, MV, BM • Time-series estimates of the b over 30 months: • Cross-sectional estimates: • Expected returns b • Expected returns  MV and/or BM • Expected returns b and/or MV, BM • Adjusted Fama-MacBeth t-statistics: • GLS (Ferson and Harvey 99)

  11. Expected returns MV, BM

  12. Expected returns b, MV, BM

  13. Expected returns b, s, h • Time-series estimates of the b, s and h over 30 months: • Cross-sectional estimates : expect. ret. b, s, h : • Adjusted Fama-MacBeth t-statistics • GLS (Ferson and Harvey 99)

  14. Expected returns b, s, h

  15. Expected returns  s, h

  16. Expected returns b, s or h

  17. Conclusion • No significant relation between expected returns and estimated coefficients b or s and h: • Errors in variables problem • Two-pass procedure problem • Significant relation between expected returns and: • Non estimated factors ("attributes") : MV and BM • b coefficient in association with MV, BM, s or h  MV, BM, s et h conditional factors ?

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