Journal of Finance 1997

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Kent Daniel¹; Sheridan Titman^2,1,3,4

¹ National Bureau of Economic Research · ² Northwestern University · ³ University of Illinois Chicago · ⁴ The University of Texas at Austin

Abstract

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.

DOI

10.2307/2329554

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