Conditional risk and predictability of Finnish stock returns

Markku Malkamäki

No 31/1992, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper studies the driving forces of predictable variation in Finnish stock returns. The dynamics of Ferson and Harvey's (1991) methodology are extended and applied within the Sharpe-Lintner CAPM. We find that market risk is conditionally priced in the thin Finnish stock market. Most of the predictable variation of stock returns is attributed to the time-varying risk premium, which supports the hypothesis of rational behavior by Finnish investors in setting stock prices. However, the conditional residual term accounted for a larger part of the predictable variation of the stock returns than is found in the US market.

Date: 1992
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp1992_031

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