Abstract
The purpose of this study is the cross-section of the European Union stock and bond returns and their time-series properties. This study is based on the work of Ralph S.J.Koijen, Hanno Lustig, Stijn Van Nieuwerburgh (2017) ‘The cross-section and time series of stock and bond returns’, Journal of monetary economics, Vol 88, pp 50-69 where data used came from the United States market and this study is a corresponding study for the European market. It will examine whether a linear model with three variables, the SXXP600 index, the 5-year-2-year bond spread and the CP factor, can estimate efficiently bond and stock returns in the European Union. Stocks will be classified to portfolios with different Book Value to Market Value and their returns will be examined when investing at the beginning of growth and at the beginning of recession. The above model will be applied to estimate the returns of the abovementioned portfolios as well as the returns of 1-year to 5-year bonds.
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