Equity market anomalies in major European economies

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This paper investigates five leading equity market anomalies – size, value, momentum, profitability, and asset growth, for four Western European markets, namely, Germany, France, Italy and Spain, from January 2002 to March 2018. The study tests whether these anomalies reverse under different macro-economic uncertainty conditions, and evaluates if strategies based on time diversification can be formed using these equity market anomalies. Market anomalies were tested using four major asset pricing models – the Capital Asset Pricing Model, the Fama-French three-factor model, the Carhart model, and the Fama-French five-factor model. Macro-economic uncertainty was tested using two proxies, namely VIX and default premiums. Time diversified strategies were examined by estimating Sharpe ratios of combined portfolios formed by combining winner univariate portfolios. Value effect in Germany, Size effect in France and Profitability effect in Italy and Spain provide the highest unadjusted returns on long side strategies. No significant reversal of these anomalies was found under different macroeconomic uncertainties. Asset pricing tests show that CAPM works well for Spain and Italy, while Carhart’s model explains returns in Germany. The Fama-French five factor model does not seem to be a good descriptor of asset pricing for data. No suitable model for explaining asset returns is identified for France. Finally, it is observed that some of the equity market anomalies seem to be countercyclical and therefore provide time diversification opportunities. The study has implications for academicians, investors, and policy makers by providing insights for developing profitable investment strategies and highlighting the efficacy of alternative models as performance benchmarks.

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    • Table 1. Mean unadjusted returns for attribute sorted portfolios
    • Table 2. CAPM results
    • Table 3. Fama-French three-factor model
    • Table 4. Carhart model results
    • Table 5. Fama-French five-factor model results
    • Table 6. Comparison of the performance of univariate and bivariate strategy winners
    • Table 7. Asset pricing tests for bivariate strategies
    • Conceptualization
      Asheesh Pandey, Sanjay Sehgal
    • Data curation
      Asheesh Pandey, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Formal Analysis
      Asheesh Pandey, Sanjay Sehgal, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Funding acquisition
      Asheesh Pandey, Sanjay Sehgal, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Methodology
      Asheesh Pandey, Sanjay Sehgal
    • Investigation
      Asheesh Pandey, Sanjay Sehgal
    • Project administration
      Asheesh Pandey, Sanjay Sehgal
    • Resources
      Asheesh Pandey, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Software
      Asheesh Pandey, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Supervision
      Asheesh Pandey, Sanjay Sehgal
    • Validation
      Asheesh Pandey, Sanjay Sehgal
    • Visualization
      Asheesh Pandey, Sanjay Sehgal
    • Writing – original draft
      Asheesh Pandey, Amiya Kumar Mohapatra, Pradeepta Kumar Samanta
    • Writing – review & editing
      Asheesh Pandey, Sanjay Sehgal