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The Role of Beta and Size in the Cross‐Section of European Stock Returns
Author(s) -
Heston Steven L.,
Rouwenhorst K. Geert,
Wessels Roberto E.
Publication year - 1999
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00077
Subject(s) - beta (programming language) , stock (firearms) , excess return , economics , econometrics , financial economics , monetary economics , risk premium , geography , archaeology , computer science , programming language , context (archaeology)
This paper examines the ability of beta and size to explain cross‐sectional variation in average returns in 12 European countries. We find that average stock returns are positively related to beta and negatively related to firm size. The beta premium is in part due to the fact that high beta countries outperform low beta countries. Within countries high beta stocks outperform low beta stocks only in January, not in other months. We reject the hypothesis that differences in average returns on size‐ and beta‐sorted portfolios can be explained by market risk and exposure to the excess return of small over large stocks (SMB). Consistent with recent US evidence, we find that after controlling for size, there is no association between average returns and exposure to SMB.