Summary
Based on time-series regressions, this paper analyses whether multifactor models according to Fama/French (1993) can capture the time variation in returns and if they can explain the cross-section of average returns in the German stock market. It is shown that similar to studies for the US, Canadian, and UK stock market, a three-factor model that includes stock market factors related to firm size and book-to-market equity, besides the overall stock market factor, has a higher explanatory power than the one-factor model based on the Capital Asset Pricing Model. In contrast, two bond market factors (related to the term spread and default risks) in a five-factor model have no additional explanatory power. Indeed, the three-factor model can capture the time variation in stock returns for Germany to a less extent than for the US and UK. In contrast, the cross-section of average returns are better explained in the German stock market compared to the US stock market.