Stock returns, size, and book-to-market equity
Purpose - The purpose of this paper is to reinvestigate the performance of common stock returns with respect to two popularly known firm level characteristics: size and book-to-market ratio. Design/methodology/approach - All of New York Stock Exchange, American Stock Exchange, and National Association of Securities Dealers Automated Quotations stocks between July 1926 and June 2007 are used, and divided into various size and book-to-market equity groups. The extension of the various versions of the simple Fama-French model is implemented. Findings - From the findings, it is inferred that: two risk factors based on the mimicking return for the size and book-to-market ratio play a significant role in capturing strong variation in stock returns; and volatility persistence can significantly improve the common risk factors' impact in explaining the time series variation in size and book-to-market sorted portfolios. Research limitations/implications - In some sense, the model is based on only two firm level variables. In reality there exists plenty of other sources of average return anomalies. For a clearer understanding, an integration of various firm level characteristics would be an interesting issue to explore. A general equilibrium model that incorporates volatility exposure in a Fama-French framework would be a challenging task as well. Practical implications - The approach will help scholars and investment professionals make robust quantification of risk and average returns with respect to various measures of fundamental value. Originality/value - The patterns in the monthly and yearly average excess returns with respect to two firm level characteristics, which documented are consistent with earlier studies. Even though the important role of firm level characteristics on the average-return anomalies of common stocks is widely known, the approach is the very first that extends its support with respect to volatility models.
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Volume (Year): 26 (2009)
Issue (Month): 3 (July)
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References listed on IDEAS
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- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
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- Chou, Ray Yeutien, 1988. "Volatility Persistence and Stock Valuations: Some Empirical Evidence Using Garch," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-294, October-D.
- Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
- Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
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