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BA-FI4: Asset Pricing
Donnerstag, 19.03.2020:
9:00 - 10:30

Chair der Sitzung: Oliver Entrop, Universität Passau
Ort: Virtueller Raum 5

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The Remarkable Relevance of Characteristics for Momentum Profits

Birgit Müller1,2, Sebastian Müller2

1Darmstadt University of Technology, Deutschland; 2German Graduate School of Management and Law, Deutschland

Diskutant: Olaf Korn (Universität Göttingen)

This paper provides a comprehensive analysis of a large set of momentum enhancing strategies for global equity markets. Our findings reveal the relevance of characteristics in enhancing and explaining momentum after accounting for possible interrelations with idiosyncratic volatility and extreme past returns. Out of a set of eighteen stock characteristics, we find particularly age, book-to-market, maximum daily return, R2, information diffusion, and 52-week high price to matter for momentum profits. Overall, and consistent with behavioral explanation attempts, momentum appears to work best for hard-to-value firms with high information uncertainty. There are however substantial cross-country differences with regard to which characteristics truly enhance momentum. Our results imply that the link between idiosyncratic volatility, extreme past returns, and momentum profits itself is unable to comprehensively explain enhanced momentum returns and corroborate the heterogeneity of stock markets around the globe.

The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns: International Evidence

Alain Krapl1, Armin Varmaz2

1Haile/US Bank College of Business, Northern Kentucky University; 2School of international Business, Hochschule Bremen, Deutschland

Diskutant: Birgit Müller (TU Darmstadt)

Using the framework of the International Capital Asset Pricing (ICAPM), we explore two central topics associated with equity foreign exchange (FX) risk premia. First, we estimate ICAPM-consistent FX risk premia for a large cross-section of firms. Second, we study the diversifiability of FX risk. Using equity data from six major financial markets, we find overall support for FX risk being a priced factor in the unconditional setting. While FX risk appears to be priced in the cross-section of stock returns, the estimates of pre-formation exposures are informative to investors, the predictive power of future stock’s risks seems to exist, the ICAPM’s limited predictive power for stock returns is of concern. Nevertheless, empirical estimates of FX risk premia are economically meaningful for most of the sample markets, and FX risk only seems to be diversifiable for U.S. firms.

Capital Share Risk in International Asset Pricing

Birgit Müller1,2, Sebastian Müller2, Dirk Schiereck1

1Darmstadt University of Technology, Deutschland; 2Technical University of Munich, Deutschland

Diskutant: Armin Varmaz (Hochschule Bremen)

We study whether growth in the capital share (KS) of aggregate income (GDP) can explain equity portfolio returns in international stock markets as proposed by Lettau et al. (2019) for the U.S. market. We find that growth in local capital share has positive explanatory power for equity portfolio returns within North America, Japan, and Emerging Markets. Unlike the U.S. market, though, the information contained in the KS risk factor of these international markets does not subsume information contained in alternative factor models as for instance the Fama-French three factor or q-factor models, but rather adds additional explanatory content to these model specifications. At an aggregate level, a growth in capital share does hardly imply any growth in equity portfolio returns in the European and Pacific regions. Lastly, we report an apparent strong explanatory power of the U.S. KS factor for international equity markets, which however seems to be almost entirely driven by equity portfolio return correlations between the U.S. and international markets.

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