Conditional risk and predictability of Finnish stock returns
Malkamäki, Markku (28.10.1992)
Numero
31/1992Julkaisija
Bank of FinlandSuomen Pankki
1992
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201808021865Tiivistelmä
This paper studies the driving forces of predictable variation in Finnish stock returns. The dynamics of Ferson and Harvey's (1991) methodology are extended and applied within the Sharpe-Lintner CAPM. We find that market risk is conditionally priced in the thin Finnish stock market. Most of the predictable variation of stock returns is attributed to the time-varying risk premium, which supports the hypothesis of rational behavior by Finnish investors in setting stock prices. However, the conditional residual term accounted for a larger part of the predictable variation of the stock returns than is found in the US market.