Stock returns and macroeconomic risk premiums: an empirical study for the German capital market


Asset Pricing, Empirical Capital Market Research

Zeitschrift für Bankrecht und Bankwirtschaft [Journal of Banking Law and Banking] no. 2, 73-82 (2005)


Bessler, Dr. W. Opfer, H.


This study identifies and analyses the macroeconomic factors that are suitable for explaining the expected stock returns in the German capital market in the period from 1974 to 2002. First, the risk premiums are estimated with a static model approach for the entire period covered by the study. This reveals only a few hints of significant risk premiums. In contrast, a considerable proportion of significant risk premiums can be documented over the course of time on the basis of sliding estimates. In particular, plausible characteristics of risk premiums are revealed for three macroeconomic factors over the course of time. It can also be shown that most risk premiums significantly contribute to explaining the expected returns. In contrast, the risk premiums only reveal a small proportion of significant estimators for the residual market factor. This result can be interpreted as an indication that the macroeconomic factors are of primary importance for expectation formation in the stock market and therefore replace the market factor. The importance and form of risk premiums are subject to fluctuations over the course of time, however, the majority of characteristics are economically plausible and congruent with the results from other empirical studies. It is also evident that the results depend on the methods used for the expectation specification. In this context, however, the risk premium estimates on the basis of the VAR and the ARIMA models come to similar results.

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