Return Differences on the Swedish Stock Market When Incorporating Different Value-Factors

Abstract

In this paper, we investigate the predictability in stocks return on the Swedish equity market between 2006 and 2017. Answering the question, what is the differences in using Fama-French three-factor model when applying different constructed portfolios? Previous literature examines this topic on the American stock market. Since the American market differ from the Swedish, for instance in terms of size, supply of securities and liquidity, we found it intriguing to investigate if the same outcome occurs on the Swedish market. We use Fama-French three-factor model regressions for 21 portfolios, sorted on earnings-to-price and book-to-price individually as well as combining them both. Also, we conduct a GRS-test to compare the different sets of regressions and evaluate the performance. We find that the earnings-to-price ratio enhances the return predictability on the Swedish stock market. Further, we conclude that the joint sorted portfolios do not describe the stock returns more accurately than the earnings-to-price or the book-to-price ratio used individually.