Short-term returns and the predictability of Finnish stock returns

The predictability of Finnish stock returns is studied using the framework of Ferson and Harvey (1993). We use a conditional asset pricing model where risk premia and risk sensitivities are conditioned on a range of financial information variables. In particular, we study the effect of the return interval on the predictability of short-term stock returns. Using daily, weekly, and monthly Finnish size and industry-sorted portfolio returns, we find that the predictability of returns increases with the length of return interval, but so does the power of the conditional pricing model to explain the predictability. Consistent with earlier results, we report that the time variation in risk premium accounts for most of the predictability. However, the results show also there is a sizable positive interaction between beta and risk premium which seems to increase for smaller companies.