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European Stock Return Predictors

Posted in Fundamental Valuation, Technical Trading

Can investors effectively use firm characteristics to screen European stocks? In their August 2019 paper entitled "Predictability and the Cross-Section of Expected Returns: Evidence from the European Stock Market", Wolfgang Drobetz, Rebekka Haller, Christian Jasperneite and Tizian Otto examine the power of 22 firm characteristics to predict stock returns individually and jointly. They assume market-based characteristics are available immediately and accounting-based characteristics are available four months after firm fiscal year end. For multi-characteristic predictions, they consider 5-characteristic, 8-characteristic and 22-characteristic models. For regression-based forecasts, they use either 10-year rolling or inception-to-date monthly inputs. For economic tests, they form equal-weighted or value-weighted portfolios that are each month long (short) the tenth, or decile, of stocks with the the highest (lowest) expected next-month returns based on 22-characteristic regression outputs. To estimate net performance, they apply one-way trading frictions of 0.57%. Using groomed monthly data for all firms in the STOXX Europe 600 index during January 2003 through December 2018, they find that:

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