Model comparison in German stock returns

Abstract

Purpose

In order to provide an updated view on the drivers of German stock returns, the authors evaluate the relative performance of nine competing neoclassical asset pricing models in the German stock market between November 1991 and December 2021.

Design/methodology/approach

The authors conduct asymptotically valid tests of model comparison when the extent of model mispricing is gauged by the squared Sharpe ratio improvement measure of Barillas et al. (2020).

Findings

The study finds that the Fama and French six-factor model with both traditional and updated value factors emerges as the dominant model.

Originality/value

The authors shed new light on the drivers of German stock returns through an updated and extended period of analysis, wider range of potential models and utilization of valid asymptotic tests of model comparison when models are nonnested (Barillas et al., 2020).

Citation

O'Connell, M. (2023), "Model comparison in German stock returns", Journal of Economic Studies, Vol. 50 No. 6, pp. 1245-1259. https://doi.org/10.1108/JES-05-2022-0261