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Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

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  • Kent Daniel
  • Sheridan Titman

Abstract

Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5604.

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Date of creation: Jun 1996
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Publication status: published as Journal of Finance, March 1997.
Handle: RePEc:nbr:nberwo:5604

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  1. Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(3), pages 451-471, September.
  2. Jegadeesh, Narasimhan, 1992. "Does Market Risk Really Explain the Size Effect?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 27(03), pages 337-351, September.
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  16. Chan, Louis K. C. & Jegadeesh, Narasimhan & Lakonishok, Josef, 1995. "Evaluating the performance of value versus glamour stocks The impact of selection bias," Journal of Financial Economics, Elsevier, Elsevier, vol. 38(3), pages 269-296, July.
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