Value/Size Bibliography

References

A

Ali, A., L-S Hwang, and M. A. Trombley. 2003. Arbitrage Risk and the Book-to-Market Anomaly. Journal gay sex of Financial Economics 69(2): 355-373.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=316659 (working paper)

http://www.sciencedirect.com/science/article/B6VBX-48N30X4-4/2/d68611feaa1dd217369f6b55e56f3b3b (accepted version available for purchase)

Abstract:

This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs and lower investor sophistication, consistent with the market mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond the transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

Anderson, K. P. and C. Brooks. 2006. The Long-Term Price-Earnings Ratio. Journal of Business Finance & Accounting 33(7-8): 1063-1086.

Link: http://www.dur.ac.uk/k.p.anderson/Long-Term%20PE.pdf

Abstract:

The price-earnings effect has been thoroughly documented and is the subject of numerous academic studies. However, in existing research it has almost exclusively been calculated on the basis of the previous year’s earnings. We show that the power of the effect has until now been seriously underestimated due to taking too short-term a view of earnings. Looking at all UK companies since 1975, using the traditional P/E ratio we find the difference in average annual returns between the value and glamour deciles to be 6%. This is similar to other authors’ findings. We are able to almost double the value premium by calculating the P/E ratio using earnings averaged over the previous eight years.

Asness, C., J. Friedman, R. Krail, and J. Liew. 2000. Style Timing: Value versus Growth. Journal of Portfolio Management 26(3): 50-60.

Link: http://www.iijournals.com/doi/abs/10.3905/jpm.2000.319724 (requires subscription)

Abstract:

Both academic and industry research supports the long–term efficacy of value strategies are far from riskless, however. They can have long periods of poor performance. In an effort to improve upon these strategies, the authors have tried to forecast these returns with mixed results. Most of these “style timing” models re based on macroeconomic factors. The authors take a different approach considering two simple factors: 1) the spread in valuation multiples between a value portfolio and a growth portfolio (the value spread), and 2) the spread in expected earnings growth between a growth portfolio and a value portfolio (the earnings growth spread). They find that the greater the value spread and the smaller the earnings growth spread, the better their forecast for value versus growth going forward. These results are statistically and economically strong.

Asness, C., T. Moskowitz, and L. Pedersen. 2009. Value and Momentum Everywhere. AFA 2010 Atlanta Meetings Paper.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1363476 (working paper)

Abstract:

Value and momentum ubiquitously generate abnormal returns for individual stocks within several countries, across country equity indices, government bonds, currencies, and commodities. We study jointly the global returns to value and momentum and explore their common factor structure. We find that value (momentum) in one asset class is positively correlated with value (momentum) in other asset classes, and value and momentum are negatively correlated within and across asset classes. Liquidity risk is positively related to value and negatively to momentum, and its importance increases over time, particularly following the liquidity crisis of 1998. These patterns emerge from the power of examining value and momentum everywhere simultaneously and are not easily detectable when examining each asset class in isolation.


 

B

Banz, R. W. 1981. The Relationship between Return and Market Value of Common Stocks. Journal of Financial Economics 9(1): 3-18.

Link: http://www.mendeley.com/research/the-relationship-between-return-and-market-value-of-common-stock/#

Abstract:

This study examines the empirical relationship between the return and the total market value of NYSE common stocks. It is found that smaller firms have had higher risk adjusted returns, on average, than larger firms. This `size effect’ has been in existence for at least forty years and is evidence that the capital asset pricing model is misspecified. The size effect is not linear in the market value; the main effect occurs for very small firms while there is little difference in return between average sized and large firms. It is not known whether size per se is responsible for the effect or whether size is just a proxy for one or more true unknown factors correlated with size.

Basu, S. 1977. Investment Performance of Common Stocks in Relation to their Price–Earnings Ratios: A Test of the Efficient Markets Hypothesis. Journal hentai videos of Finance 32(3): 663–682.

Link:     http://www.e-m-h.org/Basu1977.pdf

            http://www.jstor.org/pss/2326304 (available for sale)

Abstract: N/A

Blitz, D. and P. Vliet. 2008. Global Tactical Cross-Asset Allocation: Applying Value and Momentum across Asset Classes. Journal of Portfolio Management 35(1): 23-38.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1079975

Abstract:

In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return exceeding 9% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by implicit beta exposures or the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient ‘smart money’ being available to arbitrage mispricing effects away.

Brav, A. and J. B. Heaton III. 2002. Competing Theories of Financial Anomalies. Review of Financial Studies 15(2): 575-606.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=204330 (working paper)

http://rfs.oxfordjournals.org/content/15/2/575.abstract (accepted version available for sale)

Abstract:

We compare two competing theories of financial anomalies: (1) “behavioral” theories built on investor irrationality; and (2) “rational structural uncertainty” theories built on incomplete information about the structure of the economic environment. We find that although the theories relax opposite assumptions of the rational expectations ideal, their mathematical and predictive similarities make them difficult to distinguish. Interestingly, even if irrationality generates financial anomalies, their disappearance still may hinge on rational learning – that is, on the ability of rational arbitrageurs and their investors to reject competing rational explanations for observed price patterns.

Brown, P., A. W. Kleidon, and T. A. Marsh. 1983. New Evidence on the Nature of Size-Related Anomalies in Stock Prices. Journal of Financial Economics 12(1): 33-56.

Link: http://www.sciencedirect.com/science/article/B6VBX-45N4YW5-P/2/26e695646033aa8ecc26d8c299c9e0f0 (available for sale)

Abstract:

This paper is concerned with the size-related anomalies in stock returns reported by Banz (1981) and Reinganum (1981). They showed that small firms have tended to yield returns greater than those predicted by the traditional CAPM. We find that the size effect is linear in the logarithm of size, but reject the hypothesis that the ex ante excess return attributable to size is stable through time. We briefly analyze the Seemingly Unrelated Regression Model (SURM) and a two-step procedure as two alternative estimators of the size effect. Due to the instability of the effect, we find that the estimates are sensitive to the time period studied.


 

C

Chan, L. K. C., Y. Hamao, and J. Lakonishok. 1991. Fundamentals and Stock Returns in Japan. Journal animated porn of Finance 46(5): 1739-1764.

Link: http://ia600405.us.archive.org/11/items/fundamentalsstoc1664chan/fundamentalsstoc1664chan.pdf (working paper)

http://www.jstor.org/pss/2328571 (accepted version available for sale)

Abstract:

This hot lesbian porn paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high-quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. The authors’ findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.

Chava, S. and A. Purnanandam. 2010. Is Default Risk Negatively Related to Stock Returns? Review of Financial Studies 23(6): 2523-2559.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1003682 (working paper)

http://rfs.oxfordjournals.org/content/23/6/2523 (requires subscription)

Abstract:

We find a positive cross-sectional relationship between expected stock returns and default risk, contrary to the negative relationship estimated by prior studies. Whereas prior studies use noisy ex post realized returns to estimate expected returns, we use ex ante estimates based on the implied cost of capital. The results suggest that investors expected higher returns for bearing default risk, but they were negatively surprised by lower-than-expected returns on high default risk stocks in the 1980s. We also extend the sample compared with prior studies and find that the evidence based on realized returns is considerably weaker in the 1952–1980 period.

Chen, L., R. Petkova, and L. Zhang. 2008. The Expected Value Premium. Journal of Financial Economics 87: 269-280.

Link: http://fisher.osu.edu/~zhang_1868/ChenPetkovaZhang08JFE.pdf

Abstract:

Fama and French [2002. The equity premium. Journal of Finance 57, 637–659] estimate the equity premium using dividend growth rates to measure expected rates of capital gain. We apply their method to study the value premium. From 1945 to 2005, the expected value premium is on average 6.1% per annum, consisting of an expected dividend growth component of 4.4% and an expected dividend price ratio component of 1.7%. Unlike the equity premium, the value premium has been largely stable over the last half century.

Cohen, R. B., C. Polk, and T. Vuolteenaho. 2003. The Value Spread. Journal of Finance 58(2): 609-641.

Link: http://personal.lse.ac.uk/polk/research/jofi_5802005.pdf

Abstract:

We decompose the cross-sectional variance of firms’ book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20 to 25 percent) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15 -year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. We also show that the expected return on value-minus-growth strategies is atypically high at times when their spread in book-to-market ratios is wide.


 

D

Daniel, K. and S. Titman. 1997. Evidence on the Characteristics of Cross-Sectional Variation in Stock Returns. Journal of Finance 52(1): 1–33.

Link: http://faculty.fuqua.duke.edu/~charvey/Teaching/IntesaBci_2001/DT_Evidence_on.pdf

Abstract:

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.

Daniel, K. and S. Titman. 2006. Market Reactions to Tangible and Intangible Information. Journal of Finance 61(4): 1605-1643.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=274204 (working paper)

http://www.afajof.org/journal/abstract.asp?ref=0022-1082&vid=61&iid=4&aid=884&s=-9999 (requires subscription)

Abstract:

Previous empirical studies suggest a negative relationship between prior 3-5 year fundamental performance and future returns: distressed firms outperform more profitable firms. In fact, we show here that after controlling for past stock returns firms with higher past fundamental returns actually outperform weaker firms. Our results are consistent with investors reacting appropriately to tangible information (defined as information which can be extracted from financial statements), but overreacting to intangible information. We explain these findings with a simple model based on the behavioral finding that investors are more overconfident about their ability to interpret intangible information. Finally, we reconcile our results with previous studies, and show that firms which grow through shareissuance activity experience low future returns, while firms that grow through increased profitability do not.

Davis, J., E. Fama, and K. French. 2000. Characteristics, Covariances, and Average Returns: 1929 to 1997. Journal of Finance 55(1): 389–406.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=98678 (working paper)

http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00209/abstract (accepted version available for sale)

Abstract:

The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is, however, weaker and less reliable than the value premium. The relations between average return and firm characteristics (size and BE/ME) are better explained by a three-factor risk model than by the behavioral hypothesis that investor overreaction causes characteristics to be compensated irrespective of risk loadings.

Demirtas, K. Ozgur and A. Burak Guner. 2008. Can Overreaction Explain Part of the Size Premium? International Journal of Revenue Management 2(3): 234-253.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=950136 (working paper)

http://inderscience.metapress.com/app/home/contribution.asp?referrer=parent&backto=issue,2,5;journal,10,16;linkingpublicationresults,1:120377,1 (requires subscription)

Abstract:

This paper uncovers several empirical regularities in the returns of small stocks. First, within the sample of firms that have low market capitalisations, stocks with low past profitability (‘laggers’) bring returns that are significantly higher than those of stocks with high past profitability (‘leaders’). Second, the size premium is generated largely by small laggers. Moreover, both patterns are particularly pronounced at earnings-announcement dates, suggesting that unexpected earnings growth can explain a portion of the abnormal returns to small stocks. Since these findings point to market inefficiency, they are especially important for the revenue management of money managers who invest in small stocks.

Dichev, Ilia D. 1998. Is the Risk of Bankruptcy a Systematic Risk? Journal of Finance 53(3): 1131–1148.

Link:     http://azyz1.tripod.com/00_project/article/dichev1998.pdf

http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00046/abstract (available for sale)

Abstract:

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, the results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and the book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. Additional results suggest that a risk-based explanation cannot fully explain the anomalous post-1980 evidence.

E

Elfakhani, S., L. J. Lockwood, and T. S. Zaher. 1998. Small Firm and Value Effects in the Canadian Stock Market. Journal of Financial Research 21(3): 277-291.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=89668

http://business.highbeam.com/3655/article-1G1-21232978/small-firm-and-value-effects-canadian-stock-market

Abstract:

We examine the relation among average returns, market beta, firm size, and book-to-market value for Canadian stocks during the 1975-92 period. We document a negative relation between average return and the market capitalization of firms, but find no relation between average return and market beta. While the small firm effect is significant during a period of reduced capital gains tax, it is noticeably lower than during the period leading up to the change. We find that average returns are positively related to book-to-market value especially during the period of lower capital gains tax.


 

F

Fama, Eugene F. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25(2), 383-417.

Link: http://www.agecon.ksu.edu/tschroeder/AGEC805/Articles/Futures/FamaEfficientmarkets.pdf

Abstract: N/A

Fama, Eugene F. 1991. Efficient Capital Markets: II. Journal of Finance 46(5): 1575-1617.

Link: http://schwert.ssb.rochester.edu/f533/jf91_fama.pdf

Abstract:

Sequels are rarely as good as the originals, so I approach this review of the market efficiency literature with trepidation. The task is thornier than it was 20 years ago, when work on efficiency was rather new. The literature is now so large that a full review is impossible, and is not attempted here. Instead, I discuss the work that I find most interesting, and I offer my views on what we have learned from the research on market efficiency.

Fama, Eugene F. and Kenneth R. French. 1992. The Cross-Section of Expected Stock Returns. Journal of Finance 47(2) 427-465.

Link: http://home.business.utah.edu/finmll/fin787/papers/famafrench1992.pdf

Abstract:

Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market “beta”, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in “beta” that is unrelated to size, t he relation between market “beta” and average return is flat, even when “beta” is the only explanatory variable.

Fama, Eugene F. and Kenneth R. French. 1993. Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics 33(1): 3-56.

Link: http://home.business.utah.edu/finmll/fin787/papers/FF1993.pdf

Abstract:

This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.

Fama, Eugene F. and Kenneth R. French. 1995. Size and Book-to-Market Factors in Earnings and Returns. Journal of Finance 50(1): 131-155.

Link:     http://bbs.cenet.org.cn/uploadImages/20035217294094908.pdf

            http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5903

Abstract:

We ebony sex video study whether the behavior of stock prices, in relation to size and book to market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.

Fama, Eugene F. and Kenneth R. French. 1997. Industry costs of equity. Journal of Financial Economics 43(2): 153-193.

Link: http://www.sciencedirect.com/science/article/B6VBX-3SWV8XR-2/2/b5d2f48fc71cd6d5752d08e5144b30d5 (available for sale)

Abstract:

Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of (i) uncertainty about true factor risk premiums and (ii) imprecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.

Fama, porn cartoon Eugene F. and Kenneth R. French. 1998. Value versus Growth: The International Evidence. Journal of Finance 53(6): 1975-1999.

Link: http://faculty.fuqua.duke.edu/~charvey/Teaching/IntesaBci_2001/FF_Value_versus.pdf

Abstract:

Value stocks have higher returns than growth stocks in markets around the world. For the period 1975 through 1995, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.68 percent per year, and value stocks outperform growth stocks in twelve of thirteen major markets. An international capital asset pricing model cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

Fama, sexy milfs Eugene F. and Kenneth R. French. 2000. Forecasting Profitability and Earnings. Journal of Business 73(2): 161−175.

Link: http://info.cba.ksu.edu/tavakkol/Research/Kiani/FamaFrench2000JoB.pdf

Abstract:

There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 40 percent per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich non-linear patterns in the behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is further from its mean in either direction. We also show that the mean reversion in profitability produces predictable variation in earnings

Fama, Eugene F. and Kenneth R. French. 2008. Dissecting Anomalies. Journal of Finance 63 (4): 1653-1678.

Link: http://schwert.ssb.rochester.edu/f532/ff_JF08.pdf

Abstract:

The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross-section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.


 

G

Gharghori, P., R. Lee, and M. Veeraraghavan. 2009. Anomalies and Stock Returns: Australian Evidence. Accounting and Finance 49(3): 555-576.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1002260 (working paper)

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-629X.2009.00298.x/abstract;jsessionid=89085306882B57B5B91702480C0909AA.d01t02 (accepted version available for sale)

Abstract:

Prior research has identified the existence of several cross-sectional patterns in equity returns, commonly referred to as effects. This paper tests for the existence of a number of well-known effects using data from the Australian equities market. Specifically, we investigate the size effect, book-to-market effect, earnings-to-price effect, cashflow-to-price effect, leverage effect and the liquidity effect. An additional aim of this paper is to investigate the capability of the Fama–French model in explaining any observed effects. We document a size, book-to-market, earnings-to-price and cashflow-to-price effect but fail to find evidence of a leverage or liquidity effect. Although our findings indicate that the Fama–French model can partially explain some of the observed effects, we conclude that its performance is less than satisfactory in Australia.

Gomes, J., L. Kogan, and L. Zhang. 2003. Equilibrium Cross Section of Returns. Journal of Political Economy 111(4): 693-732.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=264883

Abstract:

We explicitly link expected stock returns to firm characteristics such as firm size and book-to-market ratio in a dynamic general equilibrium production economy. Despite the fact that stock returns in the model are characterized by an intertemporal CAPM with the market portfolio as the only factor, size and book-to-market play separate roles in describing the cross-section of returns. These firm characteristics appear to predict stock returns because they are correlated with the true conditional market beta of returns. These cross-sectional relations can subsist after one controls for a typical empirical estimate of market beta. This lends support to the view that the documented ability of size and book-to-market to explain the cross-section of stock returns is not necessarily inconsistent with a single-factor conditional CAPM model. Our model also gives rise to a number of additional implications for the cross-section of returns. In this paper, we focus on the business cycle properties of returns and firm characteristics. Our results appear consistent with the limited existing evidence and provide a benchmark for future empirical studies.

Graham, Benjamin and David Dodd. 1934. Security Analysis. Whittlesey House.

Link: http://www.amazon.com/Security-Analysis-Classic-Benjamin-Graham/dp/0070244960 (book celebrity porn available for sale)

Abstract: N/A

Griffin, J. and M. L. Lemmon. 2002. Book-to-Market Equity, Distress Risk, and Stock Returns. Journal of Finance 57(5): 2317-2336.

Link: http://cms.sem.tsinghua.edu.cn/semcms/res_base/semcms_com_www/upload/home/store/2008/10/29/3283.pdf

Abstract:

This paper examines the relationship between book-to-market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson’s (1980) O-score, the difference in returns between high and low book-to-market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three-factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book-to-market effect is largest in small firms with low analyst coverage.

Griffin, J., P. Kelly and F. Nardari. 2007. Measuring Short-Term International Stock Market Efficiency.

Link: http://www.fma.org/Orlando/Papers/IntlInfoEff.pdf (working paper)

Abstract:

Using standard tests of weak and semi-strong form efficiency, this paper compares and contrasts the degree of information efficiency of stock prices in 56 markets around the world. In our tests of weak form efficiency we examine the sensitivity of stock returns to market-wide, size-portfolio, and firm specific past price information. Within countries these measures consistently yield the result that small firms are less efficiently priced than large firms; but across countries, they lead to the surprising finding that emerging markets are at least as efficient as developed markets. These findings are remarkably similar at the daily and weekly horizon and after a host of controls for trading frequency and other possible explanations. To examine semi-strong form efficiency, we compare post-earnings announcement drift and find similar abnormal returns in emerging and developed markets. We also examine the Morck, Yeung, and Yu (2000) R2 efficiency measure and, unlike our other efficiency measures, find that it performs poorly within countries while across countries it is not associated with institutional quality variables as originally proposed. Overall, we find that emerging markets are just as efficient as developed markets at incorporating simple forms of public information into prices and no evidence that better country-level legal, regulatory, and governance characteristics are positively related to higher levels of efficiency.

Grossman, celebrity nude S., and J. Stiglitz, 1980. On the Impossibility of Informationally Efficient Markets. American Economic Review 70(3): 393-408.

Link: http://www.aeaweb.org/aer/top20/70.3.393-408.pdf

Abstract:

If competitive equilibrium is defined as a situation in which prices are such that all arbitrage profits are eliminated, is it possible that a competitive economy always be in equilibrium? Clearly not, for then those who arbitrage make no (private) return from their (privately) costly activity. Hence the assumptions that all markets, including that for information, are always in equilibrium and always perfectly arbitraged are inconsistent when arbitrage is costly. We propose here a model in which there is an equilibrium degree of disequilibrium: prices reflect the information of informed individuals (arbitrageurs) but only partially, so that those who expend resources to obtain information do receive compensation. How informative the price system is depends on the number of individuals who are informed; but the number of individuals who are informed is itself an endogenous variable in the model. The model is the simplest one in which prices perform a well-articulated role in conveying information from the informed to the uninformed. When informed individuals observe information that the return to a security is going to be high, they bid its price up, and conversely when they observe information that the return is going to be low. Thus the price system makes publicly available the information obtained by informed individuals to the uninformed. In general, however, it does this imperfectly; this is perhaps lucky, for were it to do it perfectly, an equilibrium would not exist. In the introduction, we shall discuss the general methodology and present some conjectures concerning certain properties of the equilibrium. The remaining analytic sections of the paper are devoted to analyzing in detail an important example of our general model, in which our conjectures concerning the nature of the equilibrium can be shown to be correct. We conclude with a discussion of the implications of our approach and results, with particular emphasis on the relationship of our results to the literature on “efficient capital markets.”

Gulen, H., Y. Xing and L. Zhang. 2011. Value versus Growth: Time-Varying Expected Stock Returns. Financial Management, forthcoming.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1270976 (working paper)

Abstract:

Using the Markov switching framework of Perez-Quiros and Timmermann (2000), we show that the expected value-minus-growth returns display strong countercyclical variations. Under a variety of flexibility proxies such as the ratio of fixed assets to total assets, the frequency of disinvestment, financial leverage, and operating leverage, we show that value firms are less flexible in adjusting to worsening economic conditions than growth firms, and that inflexibility increases the costs of equity in the cross section. The time-variation in the expected value premium highlights the importance of conditioning information in understanding the cross section of average returns.


 

H

Herrera, Martin J. and Larry J. Lockwood. 1994. The Size Effect in the Mexican Stock Market. Journal of Banking and Finance 18(4): 621-632.

Link: http://www.sciencedirect.com/science/article/B6VCY-45GS910-2/2/a5897b9599d2e1a44d430045ede78f46 (available for sale)

Abstract:

This paper tests for a firm size effect in the Mexican stock market using data from January 1987 to December 1992. Our initial tests indicate that average stock returns are positively related to market betas. We also find, however, that average returns are negatively related to firm size. To measure the effects on average return of betas that are unrelated to firm size, we examine portfolios formed on the basis of size and beta We find that beta is priced in addition to firm size for the Mexican stock market, even after carefully separating the effects of beta and size.

Heston, Steven L., K. Geert Rouwenhorst, and Roberto E. Wessels. 1999. The Role of Beta and Size in the Cross-Section of European Stock Returns. European Financial Management 5(1): 9-28.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=73354

Abstract:

This paper examines the ability of beta and size to explain cross-sectional variation in average returns in twelve European countries. We find that average stock returns are positively related to beta and negatively related to firm size. The beta premium is in part due to the fact that high beta countries outperform low beta countries. Within countries high beta stocks outperform low beta stocks only in January, not in other months. We reject the hypothesis that differences in average returns on size- and beta-sorted portfolios can be explained by market risk and exposure to the excess return of small over large stocks (SMB). Consistent with recent U.S. evidence, we find that after controlling for size, there is no association between average returns and exposure to SMB.

Hirshleifer, D. 2001. Investor Psychology and Asset Pricing. Journal of Finance 56(4): 1533-1598.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=265132 (working paper)

            http://mpra.ub.uni-muenchen.de/5300/1/MPRA_paper_5300.pdf

Abstract:

The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.

Hoberg, Gerard and Ivo Welch. 2009. Optimized vs. Sort-Based Portfolios. AFA 2010 Atlanta Meetings Paper.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1327004 (working paper)

Abstract:

Factors and test portfolios can be formed by optimizing objective functions instead of by sorting. Optimizing is more parsimonious and flexible, and the portfolio returns can be easier to find. Our approach effectively marries some advantages of the Fama and MacBeth (1973) cross-sectional approach with those of the time-series approach in Black, Jensen, and Scholes (1971). Our paper shows that optimized portfolios can make a difference: they reverse the inference in Daniel and Titman (1997) and Davis, Fama, and French (2000).

Horowitz, Joel L., Tim Loughran, and N. E. Savin. 2000. Three Analyses of the Firm Size Premium. Journal of Empirical Finance 7:143-153.

Link: http://elmu.umm.ac.id/file.php/1/jurnal/J-a/Journal%20of%20Empirical%20Finance%20(New)/Vol7.Issue1-2.2000/121.pdf

Abstract:

The size premium for smaller companies is one of the best-known academic market anomalies. The relevant issue for investors is whether size premium for small-cap stocks is still positive, and, if so, whether its magnitude is substantial. In our analysis, we use annual compounded returns, monthly cross-sectional regressions, and linear spline regressions to investigate the relation between expected returns and firm size during 1980–1996. All three methodologies report no consistent relationship between size and realized returns. Hence, our results show that the widespread use of size in asset pricing is unwarranted.

Hou, K. and D.T. Robinson. 2006. Industry Concentration and Average Stock Returns. Journal of Finance 61(4): 1927–1956.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=479726 (working paper)

http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2006.00893.x/abstract (accepted version available for sale)

Abstract:

Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent in-sample cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional time-series tests support these risk-based interpretations.

Hou, K, and M. van Dijk. 2008. Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns.

Link: http://bschool.nus.edu/departments/finance/seminars/Papers/kewei%20hou.pdf (working paper)

Abstract:

Recent studies report that the size effect in U.S. stock returns has disappeared after the early 1980s. We show that the disappearance of the size effect can be attributed to unexpected shocks to the profitability of small and big firms. Small firms experience large negative profitability shocks after the early 1980s, while big firms experience large positive shocks. As a result, realized stock returns of small and big firms over this period differ substantially from expected returns. After adjusting for the impact of profitability shocks on stock returns, we find that there still is a robust size effect in expected returns. Our results suggest that in-sample cash flow shocks can have a non-trivial effect on inferences drawn from asset pricing tests.

Hou, Kewei, and Mathijs A. Van Dijk. 2010. Profitability Shocks and the Size Effect in the Cross-Section of Expected Stock Returns. Fisher College of Business WP 2010-03-001.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1536804 (working paper)

Abstract:

Recent studies report that the size effect in the cross-section of U.S. stock returns has disappeared after the early 1980s. We examine whether the disappearance of the size effect in realized returns can be attributed to unexpected shocks to the profitability of small and big firms. We show that small firms experience large negative profitability shocks after the early 1980s, while big firms experience large positive shocks. As a result, realized returns of small and big firms over this period differ substantially from expected returns. After adjusting for the price impact of profitability shocks, we find that there still is a robust size effect in expected returns. Our results suggest that in-sample cash flow shocks can significantly affect inferences about predictability in the cross-section of stock returns.


 

J

Jiang, Hao. 2010. Institutional Investors, Intangible Information, and the Book-to-Market Effect. Journal of Financial Economics 96(1): 98-126.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=964616 (working paper)

            http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VBX-4XP381C-1&_user=10&_coverDate=04%2F30%2F2010&_rdoc=1&_fmt=high&_orig=gateway&_origin=gateway&_sort=d&_docanchor=&view=c&_searchStrId=1729405093&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=90db2795154366d2a9bfe80ee64e77ba&searchtype=a (accepted version available for sale)

Abstract:

This paper establishes a robust link between the trading behavior of institutions and the book-to-market effect. Building on work by Daniel and Titman (2006), who argue that the book-to-market effect is driven by the reversal of intangible returns, I find that institutions tend to buy (sell) shares in response to positive (negative) intangible information and that the reversal of the intangible return is most pronounced among stocks for which a large proportion of active institutions trade in the direction of intangible information. Furthermore, the book-to-market effect is large and significant in stocks with intense past institutional trading but nonexistent in stocks with moderate institutional trading. This influence of institutional trading on the book-to-market effect is distinct from that of firm size. These results are consistent with the view that the tendency of institutions to trade in the direction of intangible information exacerbates price overreaction, thereby contributing to the value premium.


 

K

Kao, Duen-Li and Robert D. Shumaker. 1999. Equity Style Timing. Financial Analyst Journal 55(1): 37-48.

Link: http://www.jstor.org/pss/4480137

Abstract:

The studies reported here had two purposes: (1) to review the opportunities in short-term timing strategies in the U.S. market and (2) to explore value versus growth investing in theory and in practice. We found that timing strategies in the U.S. market based on asset class and size have historically provided more opportunity for outperformance than a timing strategy based on value (versus growth), albeit with similar information ratios. A multivariate macroeconomic analysis shows that return differences between value and growth stocks can have a straightforward, intuitive basis. In practice, the approach of style timers may vary, but successful style timing depends on efficient implementation.

Keim, Donald B. 1983. Size-Related Anomalies and Stock Return Seasonality. Journal of Financial Economics 12: 13-32.

Link: http://www.buec.udel.edu/coughenj/finc872_keim_jfe1983.pdf

Abstract:

This study examines, month-by-month, the empirical relation between abnormal returns and market value of NYSE and AMEX common stocks. Evidence is provided that daily abnormal return distributions in January have large means relative to the remaining eleven months, and that the relation between abnormal returns and size is always negative and more pronounced in January than in any other month — even in years when, on average, large firms earn larger risk-adjusted returns than small firms. In particular, nearly fifty percent of the average magnitude of the ‘size effect’ over the period 1963–1979 is due to January abnormal returns. Further, more than fifty percent of the January premium is attributable to large abnormal returns during the first week of trading in the year, particularly on the first trading day.

Kelly, S., J. McClean, and R. McNamara. 2008. The Low P/E Effect and Abnormal Returns for Australian Industrial Firms. 21st Australasian Finance and Banking Conference 2008 Paper

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1254643 (working paper)

Abstract:

While the low P/E effect has been examined rather extensively in international markets particularly in the US, there is a notable absence of Australian market-based P/E studies. This research examines the relationship between the investment performance of Australian Industrial common stock and their P/E ratios in an attempt to uncover potential for a P/E based trading strategy. The excess and differential returns of P/E ranked portfolios containing 1310 Industrial firms over a 9 year period (January 1998 to December 2006) are examined. The results show the existence of a low P/E effect in the Australian capital market. Furthermore, the superior returns of low P/E stocks increase when a consensus of two business failure prediction models is applied to the portfolio of low P/E stocks. The statistically significant risk-adjusted returns afforded to hypothetical investors over the sample period (up to 12¿% per annum), not only provide support for a P/E based trading strategy, but also suggest a violation of the semi-strong form of the Efficient Market Hypothesis.


 

L

Lakonishok, J., A. Shleifer, and R. W. Vishny. 1994. Contrarian Investment, Extrapolation, and Risk. Journal of Finance 49(5): 1541-1578.

Link: http://www.economics.harvard.edu/faculty/shleifer/files/ContrarianInvestment.pdf

Abstract:

For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.

Lam, Keith S. K. 2002. The Relationship between Size, Book-to-Market Equity Ratio, Earnings–Price Ratio, and Return for the Hong Kong Stock Market. Global Finance Journal 13(2): 163-179.

Link: http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6W4F-4683XPD-4&_user=10&_coverDate=12%2F31%2F2002&_rdoc=1&_fmt=high&_orig=gateway&_origin=gateway&_sort=d&_docanchor=&view=c&_searchStrId=1729762154&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=cfb08d48300f8a7a2c3e3a48b22a9070&searchtype=a (available for sale)

Abstract:

In this paper, we investigate the relation between stock returns and β, size (ME), leverage, book-to-market equity ratio, and earnings–price ratio (E/P) in Hong Kong stock market using the Fama and French (FF) [J. Finance 47 (1992) 427] approach. FF find that two variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with β, size, leverage, book-to-market equity, and E/P ratios. In this paper, similar to previous studies in Hong Kong and US stock markets, we find that β is unable to explain the average monthly returns on stocks continuously listed in Hong Kong Stock Exchange for the period July 1984–June 1997. But three of the variables, size, book-to-market equity, and E/P ratios, seem able to capture the cross-sectional variation in average monthly returns over the period. The other two variables, book leverage and market, are also able to capture the cross-sectional variation in average monthly returns. But their effects seem to be dominated by size, book-to-market equity, and E/P ratios, and considered to be redundant in explaining average returns when size, book-to-market equity, and E/P ratios are also considered. The results are consistent across sub periods, across months, and across size groups. These suggest that the results are not driven by extreme observations or abnormal return behavior in some of the months or by size groups.

Lintner, John. 1965. The Valuation of Risk Assets and Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics 47(1): 13-37.

Link: http://coin.wne.uw.edu.pl/sakowski/mrf/papers/1965.Lintner.pdf

Abstract: N/A

Loughran, T. and J. W. Wellman. 2010. New Evidence on the Relation between the Enterprise Multiple and Average Stock Returns. Journal of Financial and Quantitative Analysis, forthcoming.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1481279 (working paper)

Abstract:

Practitioners increasingly use the enterprise multiple as a valuation measure. The enterprise multiple is (equity value debt preferred stock – cash)/ (EBITDA). We document that the enterprise multiple is a strong determinant of stock returns. Following Fama and French (1993) and Chen, Novy-Marx, and Zhang (2010), we create an enterprise multiple factor that generates a return premium of 5.28% per year. We interpret the enterprise multiple as a proxy for the discount rate. Firms with low enterprise multiple values appear to have higher discount rates and higher subsequent stock returns than firms with high enterprise multiple values.


 

M

Mossin, Jan. 1966. Equilibrium in a Capital Asset Market. Econometrica 34(4): 768-783.

Link: http://efinance.org.cn/cn/fm/Equilibrium%20in%20a%20Capital%20Asset%20Market.pdf

Abstract:

This paper investigates the properties of a market for risky assets on the basis of a simple model of general equilibrium of exchange, where individual investors seek to maximize preference functions over expected yield and variance of yield on their portfolios. A theory of market risk premiums is  outlined, and it is shown that general equilibrium implies the existence of a so-called “market line,” relating per dollar expected yield and standard deviation of yield. The concept of price of risk is discussed in terms of the slope of this line.


 

N

Novy-Marx, R., L. Chen L., and L. Zhang. 2010. An Alternative Three-Factor Model.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1418117 (working paper)

Abstract:

We propose a new factor model consisting of the market factor, an investment factor, and a return on assets factor for explaining the cross-section of expected stock returns. The new factor model outperforms traditional asset pricing models in explaining anomalies such as those associated with short-term prior returns, failure probability, O-score, earnings surprises, accruals, net stock issues, and stock valuation ratios. The new model’s performance, combined with its economic intuition, suggests that it can be used to obtain expected return estimates in practice.


 

P

Pastor, L., M. Sinha, and B. Swaminathan. 2007. Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital. Journal of Finance 63: 2859-2897.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=873631 (working paper)

We reexamine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.

Penman, S. H., S. A. Richardson, and I. Tuna. 2007. The Book-to-Price Effect in Stock Returns: Accounting for Leverage. Journal of Accounting Research 45, 427-467.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=789804 (working paper)

http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2007.00240.x/full (accepted version available for sale)

Abstract:

This paper lays out a decomposition of book-to-price (B/P) that articulates precisely how B/P “absorbs” leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is negatively associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors – including the book-to-price factor – albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk.

Petkova, R. and L. Zhang. 2005. Is Value Riskier than Growth? Journal of Financial Economics 78: 187-202.

Link: http://fisher.osu.edu/~zhang_1868/PetkovaZhang05JFE.pdf

Abstract:

We study the relative risk of value and growth stocks. We find that time-varying risk goes in the right direction in explaining the value premium. Value betas tend to covary positively, and growth betas tend to covary negatively with the expected market risk premium. Our inference differs from that of previous studies because we sort betas on the expected market risk premium, instead of on the realized market excess return. However, we also find that this beta premium covariance is too small to explain the observed magnitude of the value premium within the conditional capital asset pricing model.

Pontiff, J. 2006. Costly Arbitrage and the Myth of Idiosyncratic Risk. Journal of Accounting and Economics 42: 35-52.

Link: https://www2.bc.edu/~pontiff/Documents/10_pontiff_JAE.pdf

Abstract:

Transaction and holding costs make arbitrage costly. If some traders are rational, mispricing will only exist to the extent that arbitrage costs prevent rational traders from fully eliminating inefficiencies. Although the relation between mispricing and transaction costs is well-known, the relation between mispricing and holding costs is misunderstood. One holding cost, idiosyncratic risk, is particularly misunderstood. Various myths are debunked, including the common myth that arbitrageurs care about idiosyncratic risk because they are undiversified [Shleifer and Vishny (1997)]. The literature demonstrates that idiosyncratic risk is the single largest cost faced by arbitrageurs.


 

R

Reinganum, M. R. 1981. Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings’ Yields and Market Values. Journal of Financial Economics 9(1): 19-46.

Link: http://etd.lib.ttu.edu/theses/available/etd-09262008-31295014212772/unrestricted/31295014212772.pdf

Abstract:

This study documents empirical anomalies which suggest that either the simple one-period capital asset pricing model (CAPM) is misspecified or that capital markets are inefficient. In particular, portfolios based on firm size or earnings/price (E/P) ratios experience average returns systematically different from those predicted by the CAPM. Furthermore, the ‘abnormal’ returns persist for at least two years. This persistence reduces the likelihood that these results are being generated by a market inefficiency. Rather, the evidence seems to indicate that the equilibrium pricing model is misspecified. However, the data also reveals that an E/P effect does not emerge after returns are controlled for the firm size effect; the firm size effect largely subsumes the E/P effect. Thus, while the E/P anomaly and value anomaly exist when each variable is considered separately, the two anomalies seem to be related to the same set of missing factors, and these factors appear to be more closely associated with firm size than E/P ratios.

Rosenberg, Barr, Kenneth Reid, and Ronald Lanstein. 1985. Persuasive Evidence of Market Inefficiency. Journal of Portfolio Management 11(3): 9-16.

Link: http://www.iijournals.com/doi/abs/10.3905/jpm.1985.409007 (requires subscription)

Abstract: N/A 

Ross, S. 1976. The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory 13(3): 341-360.

Link:     http://finance.wharton.upenn.edu/~rlwctr/papers/7302.PDF (working paper)

http://www.sciencedirect.com/science/article/B6WJ3-4CYGFRT-1KR/2/6acb77fd1b1ddf1b4bbf54cb6fd4d100 (accepted version available for sale)

Abstract: N/A

Rouwenhorst, celebrity nude K. Geert. 1999. Local Return Factors and Turnover in Emerging Stock Markets. Journal of Finance 54(4): 1439-1464.

Link:     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115788 (working paper)

http://www.jstor.org/pss/798010 (accepted version available for sale)

Abstract:

The factors that drive cross-sectional differences in expected stock returns in emerging equity markets are qualitatively similar to those that have been documented for developed markets. Emerging market stocks exhibit momentum, small stocks outperform large stocks, and value stocks outperform growth stocks. There is no evidence that high beta stocks outperform low beta stocks. A Bayesian analysis of the return premiums shows that the combined evidence of developed and emerging markets strongly favors the hypothesis that similar return factors are present in markets around the world. Finally, there exists a strong cross-sectional correlation between the return factors and share turnover.

Rytchkov, Oleg. 2010. Expected Returns on Value, Growth, and HML. Journal of Empirical Finance 17(4): 552-565.

Link: http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VFG-4YV82HY-1&_user=10&_coverDate=09%2F30%2F2010&_rdoc=1&_fmt=high&_orig=gateway&_origin=gateway&_sort=d&_docanchor=&view=c&_searchStrId=1730560568&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=beb71f4a64ab7e389d14dc83dcd121ee&searchtype=a (accepted version available for sale)

Abstract:

In this paper, I analyze the predictability of returns on value and growth portfolios and examine time variation of the expected value premium. As a primary tool, I use the filtering technique, which accounts for time variation in expected cash flows and explicitly exploits the constraints imposed by the present value relation. I demonstrate that returns on value and growth portfolios are predictable, and the predictability is stronger for growth stocks. Applying the filtering technique to the HML portfolio, I build a novel powerful forecaster for the value premium. The new forecaster appears to be only weakly related to business cycle variables.


 

S

Schwert, G. 2003. Anomalies and Market Efficiency. In Handbook of Economics and Finance, Chapter 15. Edited by G. M. Constantinides, M. Harris and R. Stulz.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=338080 (working paper)

Abstract:

Anomalies are empirical results that seem to be inconsistent with maintained theories of asset-pricing behavior. They indicate either market inefficiency (profit opportunities) or inadequacies in the underlying asset-pricing model. The evidence in this paper shows that the size effect, the value effect, the weekend effect, and the dividend yield effect seem to have weakened or disappeared after the papers that highlighted them were published. At about the same time, practitioners began investment vehicles that implemented the strategies implied by some of these academic papers. The small-firm turn-of-the-year effect became weaker in the years after it was first documented in the academic literature, although there is some evidence that it still exists. Interestingly, however, it does not seem to exist in the portfolio returns of practitioners who focus on small-capitalization firms. All of these findings raise the possibility that anomalies are more apparent than real. The notoriety associated with the findings of unusual evidence tempts authors to further investigate puzzling anomalies and later to try to explain them. But even if the anomalies existed in the sample period in which they were first identified, the activities of practitioners who implement strategies to take advantage of anomalous behavior can cause the anomalies to disappear (as research findings cause the market to become more efficient).

Sharpe, William F. 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance 19(3): 425-442.

Link: http://coin.wne.uw.edu.pl/sakowski/mrf/papers/1964.Sharpe.pdf

Abstract: N/A.

Shu, Tao. 2010. Trader Composition and the Cross-Section of Stock Returns. Working Paper, University of Georgia.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890656 (working paper)

Abstract:

This paper analyzes the impact of trader composition – i.e., the fraction of total trading volume of a stock accounted for by institutional trading|on the cross-section of stock returns. During 1980-2005, trader composition is significantly different from institutional ownership, a quantity that has received much more attention in the current literature. We find that major stock market anomalies, such as return momentum, post earnings-announcement drift, value premium, and investment effect are significantly stronger in stocks with lower institutional trading volume. Furthermore, stocks with lower institutional volume underperform stocks with higher institutional volume by 0.25% to 0.53% per month depending on different return adjustments. These findings suggest a positive relationship between fraction of institutional trading volume and stock price efficiency.

Sorensen, E. and C. Lazzara. 1995. Equity Style Management: The Case of Growth and Value. In: Klein, R. Lederman, J. (Eds.), Equity Style Management. Irwin, Chicago.

Link: http://www.amazon.com/Equity-Style-Management-Evaluating-Institutional/dp/1557388601 (book available for sale)

Abstract: N/A.

Stattman, Dennis. 1980. Book Values and Stock Returns. The Chicago MBA: A Journal of Selected Papers 4: 25-45.

Link: http://www.mendeley.com/research/book-value-and-stock-returns/ (paper not available)

Abstract: N/A.

Stoll, Hans R. and Robert E. Whaley. 1983. Transaction Costs and the Small Firm Effect. Journal of Financial Economics 12, 57-79.

Link: http://www.sciencedirect.com/science/article/B6VBX-45N4YW5-R/2/3fb4dc1f4695615aa327ae58a456414b (available for sale)

Abstract:

Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.


 

V

Vassalou, M. and Y. Xing. 2004. Default Risk in Equity Returns. Journal of Finance 59(2): 831-868.

Link: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.163.9147&rep=rep1&type=pdf

Abstract:

This is the first study that uses Merton’s (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the bookto-market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama–French (FF) factors SMB and HML contain some default-related information, but this is not the main reason that the FF model can explain the cross section of equity returns.

Vuolteenaho, T. 2002. What drives firm-level stock returns? Journal of Finance 57(1): 233-264.

Link: http://teaching.ust.hk/~fina790c/stock_vuolteenaho.pdf

Abstract:

I use a vector autoregressive model (VAR) to decompose an individual firm’s stock return into two components: changes in cash-flow expectations (i.e., cash-flow news) and changes in discount rates (i.e., expected-return news). The VAR yields three main results. First, firm-level stock returns are mainly driven by cash-flow news. For a typical stock, the variance of cash-flow news is more than twice that of expected-return news. Second, shocks to expected returns and cash flows are positively correlated for a typical small stock. Third, expected-return-news series are highly correlated across firms, while cash-flow news can largely be diversified away in aggregate portfolios.


 

Z

Zhang, Lu. 2005. The Value Premium. Journal of Finance 60(1): 67-103.

Link: http://www.simon.rochester.edu/fac/zhang/ValPrem05JF.pdf

Abstract:

 

The value anomaly arises naturally in the neoclassical framework with rational expectations. Costly reversibility and countercyclical price of risk cause assets in place to be harder to reduce, and hence are riskier than growth options especially in bad times when the price of risk is high. By linking risk and expected returns to economic primitives, such as tastes and technology, my model generates many empirical regularities in the cross-section of returns; it also yields an array of new refutable hypotheses providing fresh directions for future empirical research.

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