Market and Accounting Measures of Risk: The Case of the Frankfurt Stock Exchange

Abstract

The main purpose of this study was to explore the relationship between market and accounting measures of risk and the profitability of companies listed on the Frankfurt Stock Exchange. An important aspect of the study was to employ accounting beta coefficients as a systematic risk measure. The research considered classical and downside risk measures. The profitability of a company was expressed as ROA and ROE. When determining the downside risk, two approaches were employed: the approach by Bawa and Lindenberg and the approach by Harlow and Rao. In all the analyzed companies, there is a positive and statistically significant correlation between the average value of profitability ratios and the market rate of return on investment in their stocks. Additionally, correlation coefficients are higher for the companies included in the DAX index compared with those from the MDAX or SDAX indices. A positive and in each case a statistically significant correlation was observed for all DAX-indexed companies between all types of market betas and corresponding accounting betas. Likewise, for the MDAX-indexed companies, these correlations were positive but statistical significance emerged only for accounting betas calculated on ROA. As regards the DAX index, not every correlation was positive and significant.

Keywords

• accounting beta
• ROA
• ROE
• downside risk
• downside beta
• semi-deviation