Tests of Structural Stability of Risk Premia and Returns Relationships

Paper number: 97/12

Paper date: October 1997

Year: 1997

Paper Category: Discussion Paper


Evangelos Karanikas
University of Exeter

Elias Tzavalis
University of Exeter


This paper introduces recursive Fama and MacBeth tests to assess the intertemporal significance and pervasiveness of macroeconomic factors and firm-specific characteristics in explaining the cross-section variation of expected returns in a dynamically changing stock market such as the Athens Stock Exchange. It is shown that the significance of both categories of factors depends on the changes in the macroeconomic conditions which occurred during the sample period, altering the stock market's perception of the price of risk.

JEL Classification Nos: G10; G14; G18
Keywords: Asset pricing models; Fama-MacBeth cross-section tests; recursive estimation

Corresponding Author: Dr Elias Tzavalis, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter, EX4 4RJ, UK, tel: (44) 1392 264481, fax: (44) 1392 263242, email: E.Tzavalis@exeter.ac.uk


* The authors would like to thank G. Bulkley, R.D.F. Harris, G. Hardouvelis, E. Kaplanis and J. Matatko for helpful discussion and comments.