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Market Efficiency and Fundamental Valuation. Evidence from the German Stock Exchange

Panagiotis Artikis


The present paper tests whether the intrinsic value of firm, estimated with the residual income model (RIM), and the resulting value-to-price (V/P) ratio can explain the cross section of stocks returns. The study enhances the literature in the area of asset pricing by the introduction of a new intrinsic value risk factor in such a manner as to obtain a monotonic relation between risk and expected returns. Furthermore, we incorporate in the RIM, for the first time, a time series model that does not rely on analysts’ forecasts for the estimation of the key parameters of the model.


A unique dataset from Germany is utilized, from 31/12/1989 to 30/6/2016, contributing by this way to the necessary accumulation of non-US research. The results show the existence  for longer time periods of a V/P ratio effect that is persistent and cannot be explained by either the systematic risk, the size or the BE/ME ratio of the sample firms. The results of the regressions models indicated that the intrinsic value risk factor is positively related to stock returns and that it increases the explanatory power of the asset pricing models whenever it is explicitly included in them.


Residual Income Model; Intrinsic Value; Cross-Section of Stock Returns; Value-to-price ratio; Market Efficiency

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