Common Risk Factors In The Returns On Stocks

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Common Risk Factors in the Retu rns on Stocks and Bonds
Eugene F. Fama
Kenneth R. French
Journal of Financial Economics 1993
Presenter: 周立軒

Brief Saying…
• This paper identifies Five common risk factors in the return on stocks and bonds
– Two stock market factors, two bond market factors
, one market factor.
– The five factors seems to explain all returns in stoc k market and bond market
• Except the Low-Grade Bonds

Agenda






Introduction
The Steps of the Experiment
Data & Variables
Main Result
Conclusion

Introduction
• The market βs of Sharpe-Litner, and Breedon’s c onsumption βs show little relation of the Cross-S ectional average returns on U.S common stocks.
• Empirical variables determined average returns are: – Size,
…show more content…
Adjusted Test
• If there are multiple factors in stock returns, they are all in RM.
– Break down the RM

– The sum of intercept and residuals in (1) , called RMO, is th e orthogonal market return, means it is uncorrelated with t he other four factors
– We use it to re-exam the result have shown

Adjusted Test

Adjusted Test

Adjusted Test

Test for Avg. Premium
• In this part, we will test whether the five facto rs can explain the average premiums on bond and stock markets.
• If the five factors are suffice to explain the ave rage returns in market, the intercept should be indistinguishable from 0.

Test for Avg. Premium

Test for Avg. Premium

Test for Avg. Premium

Test for Avg. Premium
• The intercept in regression on market factor shows the average premium is affected by SIZE and BE/M
E
– The market β cannot explain this
– But, the market factor is needed to explain why average returns are higher then one-month T-bill rate

• In three factor regression, the intercept is closed to
0, this means RM-Rf, HML, SMB can explain the ma rket return well
– This is a strong support for Three-Factor Model

Test for Avg. Premium
• The TERM and DEF, have little effect on explain ing the average premium, although they seem to works well on explaining stock return when used alone.
– That may because the average return for TERM an d DEF are small, but their high volatility can absorb the common variation well.
– So, they can explain the common
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