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UK Evidence on the Characteristics versus Covariance Debate

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  • Edward Lee
  • Weimin Liu
  • Norman Strong

Abstract

"We evaluate the Fama-French three-factor model in the UK using the approach of Daniel and Titman (1997) to determine whether characteristics or covariance risk better explains the size and value premiums. Across all three factors, we find that return premiums bear little relationship to the corresponding loadings. We show that small and value stocks earn higher returns irrespective of their return covariance. Our study contributes to the existing literature by reporting original findings on the Fama-French three-factor model in the UK and by reporting results that complement existing evidence from similar studies in the USA and Japan." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Edward Lee & Weimin Liu & Norman Strong, 2007. "UK Evidence on the Characteristics versus Covariance Debate," European Financial Management, European Financial Management Association, vol. 13(4), pages 742-756.
  • Handle: RePEc:bla:eufman:v:13:y:2007:i:4:p:742-756
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00381.x
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    Cited by:

    1. Ebrahim, M. Shahid & Girma, Sourafel & Shah, M. Eskandar & Williams, Jonathan, 2014. "Rationalizing the value premium in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 51-70.
    2. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    3. repec:eee:finana:v:54:y:2017:i:c:p:54-62 is not listed on IDEAS

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