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Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

  • Kent Daniel
  • Sheridan Titman

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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File URL: http://www.nber.org/papers/w5604.pdf
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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
Date of revision:
Publication status: published as Journal of Finance, March 1997.
Handle: RePEc:nbr:nberwo:5604
Note: CF
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