Structural Changes in Expected Stock Returns Relationships: Evidence from ASE

Abstract:  This paper suggests a recursive application of Fama and MacBeth's (1973) testing procedure to assess the significance of macroeconomic factors and firm-specific effects priced in explaining the cross-sectional variation of expected stock returns over time. The paper applies the suggested testing procedure to investigate the source of risks of the Athens Stock Exchange (ASE). Among the variables examined, it finds out that the changes in the short term interest rates and firm size can explain a significant proportion of the variation of the ASE individual returns. The paper argues that the significance of interest rate changes can be associated with monetary policy changes introduced by the Greek authorities after the mid-nineties. These changes were focused on targeting interest rates, instead of monetary aggregates.