New evidence for European stock markets

 

Olaf Stotz / Gabrielle Wanzenried / Karsten Döhnert

A fundamental index weighs stocks proportionally to fundamentals such as book value, dividends, or sales. We investigate risk/return characteristics of fundamentally-weighted and market-cap-weighted indexes and employ various riskadjustment approaches to ensure that return differences are not driven by risk. Based on stocks in the DJ Stoxx 600 index from July 1993 to April 2007, we show that fundamentally-weighted indexes achieve higher risk-adjusted returns than marketcap-weighted indexes. Our results provide empirical evidence for former theoretical findings that cap weighting may result in suboptimal risk/return characteristics.

Published in «FINANCIAL MARKETS AND PORTFOLIOMANAGEMENT»
Volume 24, Number 3

The Authors:

Olaf Stotz holds the BHF-BANK Endowed Chair of Private Wealth Management at Frankfurt School of Finance & Management since 2008. Having studied in Karlsruhe and Durham, he worked in the financial industry for several years. He completed his Ph.D. at Aachen University where he also held a position as an Assistant Professor in Finance. His current research interests include asset pricing, behavioral finance, empirical finance and wealth management.

Gabrielle Wanzenried is a Professor of Banking and Finance at the Lucerne University of Applied Sciences and Arts, Institute for Financial Services Zug IFZ. She holds a masters degree from the London School of Economics and a Ph.D. from the University of Bern. She also spent over two years as a research fellow at the University of California in Berkeley. Her research interests include corporate finance, private equity and managerial economies.

Karsten Döhnert is a Professor of Banking and Finance at the Lucerne University of Applied Sciences and Arts, Institute for Financial Services Zug IFZ. He received his doctoral degree from the University of Basle. His research interests include empirical finance, corporate finance, asset allocation and asset management.