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Consumption, Size and Book-to-Market Ratio in Equity Returns

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  • Pongrapeeporn Abhakorn
  • Peter N. Smith
  • Michael R. Wickens

Abstract

This study extends the standard consumption-based capital asset pricing model (C-CAPM) to include two additional factors related to firm size (SMB) and book-to-market value ratio (HML). The inclusion of HML improves mainly the fit of the low book-to-market portfolios, SMB, and HML that are not correctly priced in the standard C-CAPM. Consumption premium varies across size and coincides with the size effect. The effect of a HML premium is to reduce the amount of consumption premium, implying that low book-to-market ratio and, to a lesser degree, small portfolios are not as risky as consumption predicts. The HML premium across size is contradictory to the size effect as small firms have a larger negative HML premium.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 11/24.

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Handle: RePEc:yor:yorken:11/24

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Web page: http://www.york.ac.uk/economics/
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Keywords: Risk Premium; Equity Return; Stochastic Discount Factor; Consumption;

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