Empirical Tests of Asset Pricing Models in Finnish Stock Market

This study investigates the relationship between different sorts of risk and return on six Finnish value-weighted portfolios from the year 1987 to 2004. Furthermore, we investigate if there is a large equity premium in Finnish market. Our models are the CAPM, APT and CCAPM. Forthe CCAPM we concentrate on the parameters of the coefficient of the relative risk-aversion and the marginal rate of intertemporal substitution of consumption, whereas for the CAPM we estimate the market beta and for the APT we will select some macroeconomic factors apriori. The main contribution of this study is the use of General Method of Moments (GMM). We implement it to all of our models. We conclude that the CAPM is still a robust model, but we find also support for theAPT. In contradiction to majority of studies, we are able to get theoretically sound values for the CCAPM’s parameters. The risk-aversion parameters stay below two and the marginal rate of intertemporal substitution of consumption is close to one. The market beta is still the most dominant risk factor, but the CAPM and APT are as good interms of explanatory power.

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