A search for abnormal returns in the Swedish equity market during 2002-2012
Abstract: This study investigates the ability to generate abnormal returns using only historical accounting information in the Swedish equity market during 2002-2012. We have used the residual income valuation framework in two approaches to predict price-to-book ratios. First, a direct approach where each company is valued individually. Second, a relative approach using a cross-sectional regression. We have solely used historical information in both models. Two equally-weighted portfolios are formed based on the predictions of the direct and relative approaches. Predictions are conducted in March every year 2002-2011, and trading positions were thereafter held during a 12 month period. None of the approaches generated any significant abnormal returns after adjusting for CAPM and the Fama-French 3-factor model. Our results support the notion that historical accounting information is currently taken into account in stock prices in Sweden. The results are aligned with similar findings from Skogsvik (2008) and Skogsvik and Skogsvik (2010). Finally our study finds that historical accounting information is a good but not sufficient indicator of future performance, hence forward looking information as a complement is needed in a search for abnormal returns.
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