Seasonality in the Risk-Return Relationship: Some International Evidence

Abstract

We report evidence of seasonality in the Fama and MacBeth estimate of the CAPM-based risk premium in four stock exchanges: the NYSE and the London, Paris, and Brussels exchanges. Specifically, we found that, in Belgium and France, risk premia arepositiveinJanuaryandnegativethe rest of the year. There is no January seasonal in the U.K. risk premium. Instead, we observed in this country apositive Aprilseasonal and anegativeaverage risk premium over the rest of the year. In the U.S., the pattern of risk-premium seasonality coincides with the pattern of stock-return seasonality. Both are positive and significantonlyin January. We also found that the January risk premium in the U.S. is significantly larger than those observed in the European markets. Interestingly, the reported patterns of risk-premium seasonality in European equity markets donotfully coincide with the observed patterns of stock-return seasonality in these markets. For example, in the U.K., average stock returns are significant and positive in January and April, whereas the market risk premium is significantly positive only in April. A possible interpretation of this phenomenon is presented in the paper.