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The examination of a profitability-based four-factor model to explain stock returns: empirical evidence from the German stock market

  • In a recent publication Novy-Marx (2013) finds evidence that the variable gross profitability has a strong statistical influence on the common variation of stock returns. He also points out that there is common variation in stock returns related to firm profitability that is not captured by the three-factor model of Fama and French (1993). Thus, this thesis augments the three-factor model by the factor gross profitability and examines whether a profitability-based four-factor model is able to better explain monthly portfolio excess returns on the German stock market compared to the three-factor model of Fama and French (1993) and the Capital Asset Pricing Model (CAPM). Based on monthly stock returns of the CDAX over the period July 2008 to June 2014 this thesis documents four main findings. First, a significant positive market risk premium and a significant positive value premium can be identified. No evidence is found for a size or a profitability effect. Second, all included factors have a strong significant effect on monthly portfolio excess returns. Third, the four-factor model clearly outperforms both the three-factor model of Fama and French (1993) and the CAPM in capturing the common variation in monthly portfolio excess returns. The CAPM performs worst. Finally, the results indicate that the three-factor model of Fama and French (1993) is somewhat better in explaining the cross-section of portfolio excess returns than the four-factor model. Again, the CAPM performs worst. Nevertheless, the four-factor model is considered to be an improvement over the three-factor model of Fama and French (1993) and the CAPM in determining stock returns on the German stock market.

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Author of HS ReutlingenDaxhammer, Rolf; Kappler, Jonathan
Series (Serial Number):Reutlinger Diskussionsbeiträge zu Finanz- und Rechnungswesen (2016-1)
Publisher:Universität Tübingen
Place of publication:Tübingen
Document Type:Book
Publication year:2016
Tag:Aktienmarkt; Capital-Asset-Pricing-Modell; Deutschland; Rendite; Risiko; Statistische Analyse
Page Number:64
PPN:Im Katalog der Hochschule Reutlingen ansehen
DDC classes:330 Wirtschaft
Open access?:Ja
Licence (German):License Logo  Open Access