Explaining the Cross-section of Stock Returns in France: Characteristics or Risk Factors?

In this study, the three-factor model of Fama and French and the 'characteristic model' of Daniel and Titman are tested using the French Stock Market. Stocks are ranked by size and book to market ratio and then by ex-ante β, HML or SMB loadings. Based on average returns, results reject the...

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Bibliographic Details
Published in:The European journal of finance 2007-02, Vol.13 (2), p.145-158
Main Author: Lajili-Jarjir, Souad
Format: Article
Language:English
Subjects:
anomalies
Asset pricing
Fama and French model
Financial assets
Financial models
Financial research
France
Regression analysis
Risk factors
Securities markets
Stock prices
Stock returns
Studies
Time series
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Summary:In this study, the three-factor model of Fama and French and the 'characteristic model' of Daniel and Titman are tested using the French Stock Market. Stocks are ranked by size and book to market ratio and then by ex-ante β, HML or SMB loadings. Based on average returns, results reject the factor model with 'characteristic balanced' portfolios. In contrast, in time-series regressions, results are consistent with the factor pricing model and inconsistent with the characteristic-based pricing model. Because the value premium is small, conclusions must be interpreted carefully. However, size and market premiums allow more powerful tests of the two models.
ISSN:1351-847X
1466-4364
DOI:10.1080/13518470600813557