Seasonality in the risk-return relationship: some international evidence

Article Abstract:

We report evidence of seasonality in the Fama and MacBeth estimate of the CAPM-based risk premium in four stock exchanges: the NYSE and the London, Paris, and Brussels exchanges. Specifically, we found that, in Belgium and France, risk premia are positive in January and negative the rest of the year. There is no January seasonal in the U.K. risk premium. Instead, we observed in this country a positive April seasonal and a negative average risk premium over the rest of the year. In the U.S., the pattern of risk-premium seasonality coincides with the pattern of stock-return seasonality. Both are positive and significant only in January. We also found that the January risk premium in the U.S. is significantly larger than those observed in the European markets. Interestingly, the reported patterns of risk-premium seasonality in Europe equity markets do not fully coincide with the observed patterns of stock-return seasonality in these markets. For example, in the U.K., average stock returns are significant and positive in January and April, whereas the market risk premium is significantly positive only in April. A possible interpretation of this phenomenon is presented in the paper. (Reprinted by permission of the publisher.)

Models, Economic aspects, Stocks, Stock-exchange, Stock exchanges, Risk management, Finance, Return on investment, Rate of return

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Production and risk leveling in the intertemporal capital asset pricing model

Article Abstract:

Merton's intertemporal capital asset pricing model with multiple consumers is extended to include a description of the supply of traded securities. The production decisions of companies are examined in a model with stochastic investment opportunities and incomplete markets; firms maximize the welfare of their stockholders based on the sum of dollar values placed on projects by shareholders of the firm. A marginal change in the contract structure due to changing firm production is analyzed in terms of its monetary value to stockholders. The competitive market achieves, in this setting, an appropriately defined Nash-Constrained Pareto Optimum. Derived are: sufficient conditions for investor unanimity, market-value maximization by firms, and the equilibrium to achieve a Constrained Pareto Optimum and full Pareto Optimum.

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Derivation of the capital asset pricing model without normality or quadratic preference: a note

Article Abstract:

Several different assumptions are required by derivation of the capital asset pricing model, including normality or quadratic preference. The normality or quadratic preference assumption is shown to be replaceable by the fair game condition stating that the residual returns of assets have zero mean conditional on the return of the market portfolio. This leads to the conclusion that risk-averse investors hold the market portfolio at equilibrium.

Methods, Mathematical models, Investors, Financial research

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