Premium
Evidence on the Characteristics of Cross Sectional Variation in Stock Returns
Author(s) -
DANIEL KENT,
TITMAN SHERIDAN
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb03806.x
Subject(s) - stock (firearms) , economics , econometrics , financial economics , market capitalization , covariance , variation (astronomy) , contrast (vision) , capitalization , common stock , capital asset pricing model , stock market , geography , mathematics , statistics , context (archaeology) , physics , archaeology , artificial intelligence , astrophysics , computer science , linguistics , philosophy
Firm sizes and book‐to‐market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book‐to‐market stocks does not arise because of the comovements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross‐sectional variation in stock returns.