Profitability and Asset Prices in European Stock Markets

Table of contents

1. Introduction

2. Fundamental theory and previous discoveries
2.1. Different Factor Models
2.2. Returns of different profitable companies
2.3. Profitability anomalies

3. Profitability Anomalies in European stock markets
3.1. Construction of the model
3.2. Summary Statistics
3.3. Factor Spanning Tests
3.4. High minus low quintiles of the Profitability Anomalies
3.5. Quintiles of the Profitability Anomalies

4. Conclusions

References

Appendix
List of profitability anomalies
Correlations of the high minus low Profitability Anomalies
Quintiles of the Profitability Anomalies

Table of Diagrams and Tables

Diagram 1 Performance of the European stock market

Table 1 Summary Statistics

Table 2 Factor Spanning Tests

Table 3 High minus low quintiles of the Profitability Anomalies

Table 4 Quintiles of the Profitability Anomalies Germany

Table 5 List of profitability anomalies

Table 6 Correlations of the high minus low Profitability Anomalies

Table 7 Quintiles of the Profitability Anomalies France

Table 8 Quintiles of the Profitability Anomalies Italy

Table of Abbreviations and Symbols

Abbildung in dieser Leseprobe nicht enthalten

Abstract

In this paper, we examine profitability patterns for the German, France and Italian stock markets and compare it to previous research evidence of the European stock market. Most results of our examination are in line with previous investigations. Thus, we can confirm for all three countries, that more profitable firms earn higher risk-adjusted returns on average. Furthermore, Profitability Anomalies are present in the German and France stock market, but astonishingly not identifiable in the Italian stock markets. Five of seven profitability measures are suitable for identifying anomalies.

1. Introduction

Latest studies on asset pricing models, like (Fama & French, 2017) or (Bouchaud, et al., 2019) reveal new evidence for anomalies in the stock markets. The investigations of anomalies can be splitted in different categories: Momentum, Value-versus-growth, Investment, Intangibles, Trading frictions and Profitability.¹

Most of the investigations assess stock markets on a continental level, like Europe, North America, Japan and Asia Pacific for instance. Undoubtedly, these results are very useful for an overall statement, but leaves one question unanswered: Are there any frictions within different European stock markets?

In this paper, we will examine the Profitability Anomalies of the German, France and Italian stock markets. In 2. Fundamental theory and previous discoveries, we will discuss previous research results and discuss suitable Factor Models for the upcoming empirical investigations. Next, we will deduce a Four-Factor Model with Regional Factors and compare it to the European Factors of (French, 2019). Furthermore, we will examine different calculations of the RMW factor, to see if we can improve its predictive power. However, at the end we will investigate the core research questions of this paper: “Do more profitable firms earn higher risk-adjusted returns on average?” and “Is the Profitability Anomaly present within the European stock markets?”

Abbildung in dieser Leseprobe nicht enthalten

Diagram 1 Performance of the European stock market²

Here, we see the performance of comparable German (red), France (green), Italy (orange) and European (blue) stock indices, to get a first impression for the development of the stock markets to scrutinize.

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¹ See list in (Hou, et al., 2015, p. 664 f.).

² Diagram from (finanzen.net, 2019).