Empirical Investigation of Risk Factors at the Oslo Stock Exchange

Christian Gjerstad Hartwig & Klaus Augustin Audun Sørensen

Student thesis: Master thesis


In this thesis an empirical investigation of the Oslo Stock exchange is conducted. The main objective with the investigation is to increase our understanding of how different factors explain returns in a Norwegian context. The thesis uses data from 1996‐2016 and is limiting the tested factors to the most prevalent and researched ones in recent decades. This includes market risk, size, book‐to‐market ratio, momentum and liquidity. Relying on sorting, and statistical tests using ordinary least square time series and Fama & MacBeth regressions, results are presented for estimation of CAPM, descriptive statistics of each factor, factor risk premium estimations and multifactor model estimations. The investigation reveals that momentum and a negative liquidity risk premium, proxied by turnover ratio, is priced on the Norwegian stock market. Less evidence is found for market risk, size and book‐to‐market ratio which where all negative in the test period. Based on these results different multifactor models are tested. A three factor model including market risk, momentum and turnover ratio, and a two factor model with only momentum and turnover ratio can equally well explain asset returns on the Norwegian stock market. Based on recent research and the thesis’ empirical findings it is reasonable to assume that the size factor does not exist. The evidence for a book‐to‐market effect is ambiguous. The HML factor had a slight negative return for the full test period, but this is mainly because of the large negative HML factor in recent crises in the Norwegian stock market. Research from Næs, Skjeltorp & Ødegaard (2009) show a positive HML effect for the Norwegian market in the period 1980‐2006 and similar results have been found in several developed markets (Fama & French, 2015). The three remaining factors are explained by behavioral phenomena. The negative market risk premium is explained by high demand for high beta stocks due to investor biases and mutual fund manager’s incentives. Momentum occurs mainly because of under‐ and overreaction from the investors and it shows how these effects reverse themselves after a given period. The negative liquidity premium is explained by the fact that the measure used, turnover ratio, captures a return premium related to volume shocks which improves the visibility of a stock. Gervais, Kaniel & Mingelgrin (2001) finds similar results where these volume shocks in fact leads to higher return for a period of time.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2017
Number of pages100
SupervisorsJens Dick-Nielsen