Determinants of Expected Stock Returns: Large Sample Evidence from the German Market

Abstract

Abstract: This paper conducts a comprehensive asset pricing study based on a unique dataset for the German stock market. For the period 1963 to 2006 we show that value characteristics and momentum explain the cross‐section of stock returns. Corresponding factor portfolios have significant premiums across various double‐sorted characteristic‐based test assets. In a horse race of competing asset pricing models, the Fama‐French 3‐factor model does a poor job in explaining average stock returns. The Carhart 4‐factor model performs much better, but a 4‐factor model containing an earnings‐to‐price factor instead of a size factor does even slightly better.