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This paper studies the predictability of returns in the French stock market. It provides an analysis of predictable components of monthly common stock returns.We study a single-beta conditional model and we show that stock market risk premium is variable over the time and is important for capturing predictable variations of stock returns.We find also that the expected excess returns on small and medium capitalization stocks are more sensitive to changes in the predetermined variables such as dividend yields, default spread and term spread, than expected excess returns on large capitalization stocks.

Am er ic an Jo ur na l of Fi na nc e an d Ac co un tin g