Size and Book-to-Market Effects in the German Stock Market, 2005-2009

Table of Contents

1. Introduction

2. Literature Review

2.1. Validity of the CAPM-β

2.2. Size

2.3. Book-to-Market

3. Data

3.1. Data Sources

3.2. Data Preparation

3.3. Data Problems

4. Methodology and Empirical Results

4.1. CAPM-β

4.2. Size

4.3. Book-to-Market

4.4. Cross-Sectional Regressions

5. Conclusions

Research Objectives and Topics

This thesis investigates the explanatory power of beta, company size, and the book-to-market (B/M) ratio in relation to stock returns within the German equity market during the volatile period from 2005 to 2009. The primary research goal is to determine if these characteristics exhibit predictive power for stock returns under the specific market conditions of the recent global financial crisis.

• Empirical analysis of the Capital Asset Pricing Model (CAPM) validity in Germany.
• Examination of the "small-firm effect" and its stability during turbulent market phases.
• Evaluation of the B/M ratio's significance as a predictor of stock returns.
• Methodological assessment of portfolio construction and cross-sectional regressions in short, unstable time frames.

Excerpt from the Book

Summary of Chapters

1. Introduction: Introduces the standard CAPM model and its limitations, setting the stage for analyzing the additional explanatory power of size and book-to-market factors.

2. Literature Review: Provides an overview of academic discussions regarding the validity of beta, the size effect, and the B/M effect in various international and German equity markets.

3. Data: Details the data sources, preparation process, and potential statistical problems associated with the chosen sample of German stocks.

4. Methodology and Empirical Results: Presents the primary empirical findings using portfolios sorted by beta, size, and B/M, alongside cross-sectional regression analyses.

5. Conclusions: Summarizes the study's findings, highlighting the predictive characteristics of the analyzed factors during the observed 2005-2009 period.

Keywords

CAPM, Beta, German Stock Market, Size Effect, Book-to-Market Ratio, Financial Crisis, Equity Returns, Portfolio Sorting, Cross-Sectional Regression, Market Capitalization, Empirical Finance, Institutional Ownership, Efficient Markets, Small-Firm Premium, Asset Pricing

Frequently Asked Questions

What is the primary subject of this thesis?

This thesis examines the explanatory power of three factors—beta, company size, and the book-to-market ratio—in relation to stock returns in the German equity market.

What are the core research themes covered?

The work focuses on testing the validity of the Capital Asset Pricing Model (CAPM) and analyzing whether market anomalies like the size and B/M effects persist in the German market.

What is the main research question or goal?

The study aims to determine if the mentioned characteristics can effectively predict stock returns during a very short and turbulent period (2005-2009) impacted by the global financial crisis.

Which scientific methodology is employed?

The author uses portfolio construction methods and cross-sectional regressions to analyze the relationship between stock returns and specific firm characteristics.

What does the main part of the thesis cover?

The main section covers the collection and preparation of data, the empirical testing of beta-sorted, size-sorted, and B/M-sorted portfolios, and multivariate regression models.

Which keywords best characterize this work?

Key terms include CAPM, German Stock Market, Size Effect, Book-to-Market Ratio, and Empirical Finance.

How does the financial crisis affect the study's findings?

The crisis period introduces extreme volatility, which complicates the detection of long-term trends and leads to discrepancies when compared with earlier studies that relied on more stable, longer time series.

Why are portfolios constructed using specific market segments?

The author segments the data to ensure empirical relevance and to address issues like institutional ownership and different accounting standards relevant to the German market.

What conclusion does the author reach regarding the CAPM?

The findings reinforce the notion that the CAPM-β has limited explanatory power, especially when market conditions are turbulent, necessitating the exploration of additional risk factors.

Does the size effect persist in this analysis?

The study finds that the traditional size effect is inconsistent over the analyzed period, suggesting that it is highly sensitive to the chosen timeframe and market conditions.