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Studies on the empirical validation of beta-return relationship postulated in the CAPM has a relatively long history. The first study was conducted by John Lintner in 1965, shortly after the introduction of the model. In one of the recent studies, Malcolm Baker (forthcoming) examines two portfolios, one consisting of the 30% of U.S. stocks with the lowest beta, another of the 30% with the highest beta. By the end of the period, the low-beta portfolio significantly outperforms the high-beta portfolio (Economist, 2016).
Following two recognized testing methods developed by Lintner (1965) and Fama/MacBeth (1973), this bachelor thesis examines the nature of the relationship between beta and return for the German stock market. The sample periods observed in this study range from January 1973 to May 2016 depending on the testing method. The obtained results are then compared with the outcome of the previous studies for the European stock market. The analysis reveals that the relationship between beta and return is insignificant in most of the models. These results are consistent with the European stock market, if the unconditional cross-sectional analysis is considered.
The area of scientific research around the relationship between stocks and macroeconomic activity has been of great interest for scholars, especially after the introduction of the Arbitrage Pricing Theory. Such macro variables as industrial production and long-term interest rates, are expected to influence the stock price through the firms’ expected cash flows and the discount rate (Rapach, et al., 2005: 137).
Following this body of research, this master thesis examines the relationship between stock returns and six macro variables in the German stock market. The applied methodology ranges from standard OLS regressions with different leads of macro variables to more advanced time-series techniques.
Overall, the explanatory power of OLS regressions is quite low meaning that only a small fraction of stock returns is explained by the selected macro factors, even if some of them are statistically significant. The findings from Granger causality and Johansen cointegration tests are more conclusive but should be taken with caution