How is β related to asset returns?

Existing empirical evidence for the relevance of the β in modelling asset returns is mixed. Drawing on conditional tests of β first proposed by Pettengill, Sundaram and Mathur (1995) and extended by Bollen (2010), empirical evidence employing monthly data is presented that indicates that β is highly related to variability of asset returns but not to the level of asset returns. This result is consistent with the predictions of the market model but not with the predictions of the CAPM. It is concluded that β remains a useful construct in financial economics but may have a differing role in financial economics than the conventional wisdom asserts

An examination of conditional asset pricing models in the Australian equities market

This article examines the link between macroeconomic variables and equity returns in Australia by testing conditional asset pricing models. We find that conditioning the Fama-French model with a series of macroeconomic variables does not considerably improve its performance. However, we do find that the Fama-French factors, SMB and HML, retain their ability to explain equity returns even after the model is conditioned on macroeconomic variables. Our findings suggest that investors do not adjust their risk premiums according to the changes in the macroeconomic variables we employ.<br /

Are the Fama–French factors proxying news related to GDP growth? The Australian evidence

GDP growth, Fama–French model, Asset pricing, G12,

New evidence on the relation between stock liquidity and measures of trading activity

The goal of this paper is to examine two empirical issues regarding stock liquidity: (1) to what degree are different liquidity proxies correlated? and (2) how are different liquidity proxies related to stocks' trading characteristics? Answers to these questions will help us better understand whether there are common sources of liquidity. This has considerable implications for studying stock liquidity, since selecting an appropriate proxy for liquidity is an important issue in empirical research design. Using data from the Australian equity market, our results confirm prior research that stocks' trading characteristics are important determinants of liquidity. Though the relationships are generally consistent with expectations, some proxies do react differently to certain trading characteristics. This finding is consistent with the contention that liquidity is a multifaceted concept and each alternative proxy may only capture a certain aspect of liquidity.Stock liquidity Trading characteristics Australian evidence

Difference of opinion and the cross-section of equity returns: Australian evidence

This paper examines the relationship between difference of opinion among investors and the return on Australian equities. The paper is the first to employ dispersion in analysts' earnings forecasts, abnormal turnover and idiosyncratic volatility as proxies for difference of opinion. We document a negative relationship between difference of opinion and stock returns when dispersion in analysts' forecasts and idiosyncratic volatility are employed as proxies. This result provides support for Miller's (1977) model and is consistent with the findings of Diether et al. (2002). In contrast, we find mixed results when using abnormal turnover to proxy difference of opinion.Difference of opinion Analysts' earnings forecasts Abnormal turnover Idiosyncratic volatility