Björn Hansson

Testing the random walk hypothesis on Swedish stock prices: 1919–1990

Abstract This paper tests the random walk hypothesis on a new set of monthly data for the Swedish stock market, 1919–1990. We use both the variance ratio test and the test of autoregressions of multiperiod returns. Our results suggest that Swedish stock prices have not followed a random walk in the past 72 years. For short investment horizons, one to twelve months, we find strong evidence of positively autocorrelated returns. For longer horizons, two years or more, we find indications of negative autocorrelation, so called ‘mean reversion’. Our results are in line with recent research on the U.S. stock market and may have several implications for the practical investor. They point in particular towards a larger proportion of stocks in the portfolio for long term investors.

Testing the conditional CAPM using multivariate GARCH-M

The relation between expected return and time varying risk on the Swedish stock market for the period 1977 to 1990 is examined. Using a parsimonious multivariate GARCH-M model, the conditional Sharpe - Lintner - Mossin CAPM is tested against six alternative hypotheses, including the zero-beta version of CAPM, a conditional residual risk model, and models which nest the international CAPM and the consumption CAPM. The hypotheses are tested using beta-ranked, size-ranked, and industry-sorted portfolios. The estimates for the null hypothesis show that the price of risk is positive and significant for all portfolio groupings. Using robust LM-tests, the null hypothesis cannot be rejected in favour of any of the alternative hypotheses. In contrast to international evidence, where the traditional CAPM very often is rejected in favour of asset pricing models that rely on more general measures of risk, these results provide strong support for the Sharpe - Lintner - Mossin version of the conditional CAPM.

Computation of a monthly index for Swedish stock returns: 1919-1990

Abstract Research in the field of finance has always had a strong empirical orientation. A necessary condition of empirical research is access to relevant data.

Time Diversification and Estimation Risk

The recommendation that investors with long investment horizons tilt their portfolios toward stocks is commonplace. We used a nonparametric bootstrap approach to investigate whether in a mean-variance-efficient portfolio, the weights for U.S. stocks and U.S. T-bills vary in a systematic manner with investment horizon. This approach allowed us to analyze the impact of estimation risk on the optimal weights of stocks and fixed-income securities. The results show that an investor can gain from time diversification: The weights for stocks in an efficient portfolio were significantly larger for long investment horizons than a one-year horizon. Practitioners commonly recommend that investors with long investment horizons tilt their portfolios toward stocks and away from fixed-income securities. This behavior is an important example of putting into practice the concept of time diversification, which implies that a systematic relationship exists between the portfolio weights for a particular asset class and investment horizon. We analyzed whether mean-variance-efficient portfolio weights for stocks and bills vary significantly with the investment horizon for a buy-and-hold strategy. In this analysis, we kept the risk price, the slope of the efficient frontier, constant while varying the investment horizon from 1 year to 5 years to 10 years. The data were real U.S. return data from 1900 to 1997 for a well-diversified stock portfolio and a short-term, nominally risk-free rate. We presupposed that investors form optimal investment strategies based only on historical estimates of the following parameters or inputs to the optimization problem—means, variances, and covariances. The model we used is an unconditional model in the sense that agents do not explicitly try to model any possible time-series relationships among the assets. We implicitly accounted for any possible time dependencies in the observed return-generating processes, however, by resampling a great number of return series from the original data through the use of a computer-intensive method called “bootstrapping.” In particular, we used a nonparametric moving block bootstrap with a block length of 60 months in which serial dependence and cross-sectional correlation were preserved within the blocks. The real bonus of the bootstrap approach is the possibility of generating empirical distributions of optimal weights. Thus, we could not only analyze the existence of time diversification but could also test whether time diversification is significant in a statistical sense (i.e., if significant statistical differences exist between the optimal weights for different investment horizons). With the bootstrap approach, we could also study the impact of estimation risk (meaning that the true parameters of the return distributions are unknown) on the optimal weights of stocks and bills. In a mean-variance context, estimation risk implies that the inputs to the mean-variance model are only sample estimates, not the true parameters. The results show that estimation errors increase with the risk price and with the investment horizon. The first effect is a result of error maximization, which implies that the optimization framework chooses assets with overestimated expected returns and underestimated risks. The second effect is partly a result of fewer nonoverlapping observations existing at longer investment horizons than at shorter horizons. We provide strong evidence that for all risk prices, the weights of stock in an efficient portfolio are significantly larger for the longer horizons. A tentative explanation is that for certain investment horizons, the return-generating process for stocks is mean reverting and/or the process for bills is positively autocorrelated. Because the return spread between stocks and bills is almost constant over the investment horizons, the change in portfolio weights might stem from the fact that with longer investment horizons, the standard deviation for stocks falls whereas the standard deviation for bills increases. Our evidence supports the existence of time diversification: The weights for stock in efficient portfolios are significantly higher for long investment horizons than for a one-year horizon.

Cross-sectional analysis of Swedish stock returns with time-varying beta: the Swedish stock market 1983-96

This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables. Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book-to-market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme (Less)

Changing Risk Premia: Evidence from a Small Open Economy

Little is known about the differences in the relation between risk and return in large economies such as the United States compared with smaller, less studied, markets. In this paper, Sweden serves as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for time variation in the risk. Four different GARCH-M models are used in the econometric specification. The estimates of the price of risk are invariably positive and significant, and the authors conclude that there are small differences in the preferences towards risk of representative investors in small and large economies. Copyright 1997 by The editors of the Scandinavian Journal of Economics.

Swedish stocks, bonds, bills and inflation (1919-1990)

Cumulative index series for the Swedish security markets: common stocks, long-term government bonds, short-term risk free interest rate, consumer prices and the exchange rate SEK/

Serotonin (5-HT) and 5-HT2A receptor agonists suppress lipolysis in primary rat adipose cells

are presented. The period under consideration is from 1919 to 1990. The series are presented as annual year-end figures but are all calculated from monthly data. It is for the first time that the index for common stocks is presented for such a long period. The summary statistics of the Swedish security markets are also presented and the results from the American security markets are used as a reference. The long time period makes it possible,to estimate the sign of the relevant risk premiums as well as the existence of mean reversion in stock returns for long investment horizons.

A Critical Investigation of the Explanatory Role of Factor Mimicking Portfolios

Serotonin (5-HT) is a biogenic monoamine that functions both as a neurotransmitter and a circulating hormone. Recently, the metabolic effects of 5-HT have gained interest and peripheral 5-HT has been proposed to influence lipid metabolism in various ways. Here, we investigated the metabolic effects of 5-HT in isolated, primary rat adipose cells. Incubation with 5-HT suppressed β-adrenergically stimulated glycerol release and decreased phosphorylation of protein kinase A (PKA)-dependent substrates, hormone sensitive lipase (Ser563) and perilipin (Ser522). The inhibitory effect of 5-HT on lipolysis enhanced the anti-lipolytic effect of insulin, but sustained in the presence of phosphodiesterase inhibitors, OPC3911 and isobuthylmethylxanthine (IBMX). The relative expression of 5-HT1A, -2B and -4 receptor class family were significantly higher in adipose tissue compared to adipose cells, whereas 5-HT1D, -2A and -7 were highly expressed in isolated adipose cells. Similar to 5-HT, 5-HT2 receptor agonists reduced lipolysis while 5-HT1 receptor agonists rather decreased non-stimulated and insulin-stimulated glucose uptake. Together, these data provide evidence of a direct effect of 5-HT on adipose cells, where 5-HT suppresses lipolysis and glucose uptake, which could contribute to altered systemic lipid- and glucose metabolism.

Book-to-Market and Size Effect: Compensations for risks or outcomes of market inefficiencies

The common approach for constructing factor mimicking portfolios is to go long in assets with high loadings and to short-sell those with low loadings on some background factors. As a result portfolios containing stocks with low loading on the background factor receive negative betas against the corresponding mimicking portfolio. Thus, such portfolios appear as hedges against the background risk and may in tests of asset pricing models receive significant positive intercepts. The final result regarding acceptance or rejection of an asset pricing model may therefore to some extent be understood as a random outcome.