JultikaUniversity of Oulu repository

This thesis studies systematic risk factors and return predictability in the Finnish stock market. The purpose is to test whether global Fama French factors and three interest rate spreads are risk factors that explain the cross sectional variation of excess returns in the Finnish stock market. The thesis also studies whether these factors are variables that forecast excess stock returns in the Finnish market. Research method is a linear factor pricing model, where excess returns are explained with these six risk factors. Main result of this study is that global Fama French factors, term spread and treasury spread are variables that can be used as systematic risk factors for explaining returns in the Finnish stock market. These variables explain about half of the cross sectional variation of excess returns in the Finnish market. Results regarding excess market return are unambiguous whereas results regarding SMB, HML, term spread and treasury spread vary along the estimated indices. Results of return predictability show that term spread and treasury spread are variables that forecast returns in the Finnish stock market. Limitation of this study is that these results are not supported with out of sample tests. Therefore these results cannot be generalized. Results of this study inspires to further research which would help to evaluate whether these variables can be used as systematic risk factors in other regional markets in addition to Finnish stock market.