Excess Stock Returns: Evidence from the European Markets

European Financial Management

Posted: 4 May 1998

See all articles by Dimitrios Malliaropulos

Dimitrios Malliaropulos

University of Piraeus - Department of Banking and Financial Management; National Bank of Greece


This paper aims at decomposing the forecast error variance of excess returns in five major european stock markets into the variance of news about future excess returns, dividends and real interest rates. Special emphasis is given on the issue of stationarity and structural breaks in the unconditional mean of dividend yields and their implications for variance decompositions. Empirical results indicate that in some markets the dividend yield is subject to structural breaks in the mean. Evidence from Monte Carlo simulations suggests that this kind of structural breaks cause small-sample bias in variance decompositions of a magnitude comparable to bias introduced by unit roots. Our results constitute a warning about return decompositions that, in particular, use variables in the forecasting equations that may be nonstationary or contain a structural break.

JEL Classification: G12, G14, G15

Suggested Citation

Malliaropulos, Dimitrios, Excess Stock Returns: Evidence from the European Markets. European Financial Management, Available at SSRN: https://ssrn.com/abstract=45211

Dimitrios Malliaropulos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
(+30) 210 3341527 (Phone)
(+30) 210 3341702 (Fax)

National Bank of Greece ( email )

86 Eolou Str.
10232 Athens
+30 1 3251133 (Fax)

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