Common stock returns in the pre-WWI Berlin Stock Exchange

We provide new evidence on the efficiency of the Berlin Stock Exchange prior to World War I, when it ranked among the top few markets worldwide by market capitalization. Using a new set of monthly stock price data for a random sample of German companies between 1904 and 1910, we estimate a typical three-factor model and find that returns relate positively to risk (beta), but that book-to-market ratios enter as well (negatively). Firm size and earnings/price ratio relate positively but weakly to returns. The results indicate that the Berlin market did not suffer from unusually large pricing anomalies; thus, its performance was not substantially different from modern markets. Also supporting the conclusion of market efficiency, a momentum portfolio earns returns not different from zero, on average.