Asset Pricing Factor Models in the German Stock Market

List of Contents

1. Introduction

2. Fundamental theory and previous discoveries

2.1 Relative classification of the German stock market in an international context

2.2 The Evolution of Factor Models

2.3 Model accuracy and empirical evidence of factor models

2.4 Empirical significance of the established factors

2.5 Global and Germany specific return anomalies

3. Structural analysis of the German stock market

3.1 Basic characteristics and statistics

3.2 Factor spanning tests

3.3 Analysis of 3 x 3 sorting

3.4 Analysis of 2 x 2 x2 sorting

4. Analysis of anomalies in the German stock market

4.1 Descriptive statistics and significance of prominent anomalies

4.2 Multifactor regressions of prominent anomalies

4.3 Out-of-sample analysis of the net payout yield anomaly

5. Sector analysis of the German stock market

5.1 Descriptive statistics of sectors

5.2 Multifactor regressions for relevant sectors

5.3 Rolling window regressions of two relevant sectors

6. Fonds analysis of the German stock market

6.1 Descriptive statistics of active and passive managed fonds

6.2 Multifactor regressions of six representative fonds

6.3 Out-of-sample analysis of six representative fonds

7. Conclusion

Research Objective and Scope

This thesis examines the performance of modern multifactor asset pricing models within the German stock market. It aims to determine whether internationally recognized factor models—such as the Carhart four-factor, Fama-French five- and six-factor, q-factor, and Stambaugh-Yuan mispricing models—possess explanatory power for German equity returns, anomalies, sectors, and managed funds.

• Performance evaluation of diverse multifactor models in the German context.
• Empirical investigation of structural market characteristics and return anomalies.
• Comparative analysis of factor spanning tests and sorting methods.
• Assessment of sector-specific and equity fund performance using regression analysis.

Excerpt from the Book

Summary of Chapters

1. Introduction: This chapter introduces the overarching research question regarding the performance of modern asset pricing models in the German stock market and outlines the methodological approach.

2. Fundamental theory and previous discoveries: This section covers the theoretical foundations of factor models, starting from the CAPM, and discusses existing empirical evidence and identified return anomalies.

3. Structural analysis of the German stock market: This chapter provides an initial structural characterization of the German market, including factor spanning tests and various sorting techniques.

4. Analysis of anomalies in the German stock market: This section investigates a wide range of return anomalies to test their significance and explanatory power within the German equity market.

5. Sector analysis of the German stock market: This chapter analyzes industry-specific returns and performs multifactor regressions to evaluate sector performance and stability.

6. Fonds analysis of the German stock market: This final analytical chapter tests the applicability of factor models to actively and passively managed investment funds.

7. Conclusion: This chapter summarizes the empirical findings and answers the overarching research question, highlighting the versatility of the six-factor model.

Keywords

Asset Pricing, Factor Models, German Stock Market, Multifactor Models, Market Anomalies, Carhart Model, Fama-French Five-Factor Model, Six-Factor Model, q-Factor Model, Mispricing Factor Model, Equity Funds, Sector Analysis, Portfolio Theory, Systematic Risk, Empirical Finance.

Frequently Asked Questions

What is the primary objective of this thesis?

The research aims to evaluate how various internationally established multifactor asset pricing models perform when applied specifically to the German stock market.

Which specific asset pricing models are analyzed?

The study investigates the Carhart four-factor model, the Fama-French five- and six-factor models, the q-factor model by Hou et al., and the mispricing factor model by Stambaugh and Yuan.

What methodology is employed to test these models?

The paper utilizes various analytical methods including factor spanning tests, descriptive statistics, multifactor regressions of return anomalies, and rolling window regressions.

What constitutes the thematic core of the research?

The core focus involves structural market analysis, return anomalies, industrial sector performance, and the explanatory power of these models regarding actively and passively managed funds.

How is the German stock market contextualized?

The study first classifies the German market within an international context, comparing its size, industry composition, and ownership structure to major global markets like the U.S.

What are the primary findings regarding the models' performance?

The study finds that while no single model is universally superior, the six-factor model is generally considered the most versatile across the tested scenarios.

Does the size factor perform differently in Germany compared to international findings?

Yes, the study identifies evidence of an inverted size effect for the German stock market, which contrasts with standard international findings.

How does the study handle the impact of market crises?

The research utilizes rolling window regressions and specific sub-period correlation analyses (expansion vs. contraction) to observe how factor loadings change during volatile periods, such as the 2008 financial crisis.