1156 Words5 Pages

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

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,

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

Related

## Critical Analysis of the Relative Merits of the Capital Asset Pricing Model (Capm) and the Fama and French (F&F) Three-Factor Model (Tfm)

2528 Words | 11 PagesRelative Merits of the Capital Asset Pricing Model (CAPM) and the Fama and French (F&F) Three-Factor Model (TFM) Introduction During the 20th century, securities trading in the stock market has significantly increased. Since then, many studies have analysed the performance of managed portfolios and evaluated the way investors explain returns on stocks (Jagannathan and Wang, 1996). The most common theory used by managers and practitioners is known as the Capital Asset Pricing Model (CAPM). However

## homework week 4 Essay

1138 Words | 5 PagesChapter 8 Problem 6 The following are the historic returns for the Chelle Computer Company: Year Chelle Computer General Index Year chelle computer general index 1 37 15 2 9 13 3 -11 14 4 8 -9 5 11 12 6 4 9 Based on this information, compute the following: a. The correlation coefficient between Chelle Computer and the General Index. Answer : r= .1305 b. The standard deviation for the company and the index

## Risk And Return Analysis : Notes

1158 Words | 5 PagesRisk and Return Analysis Paige Riggs University of Phoenix Introduction There are various different financial products that one may choose to invest. Each financial product has its special features. Some of the investments have low risks and thus the return is also low. Others have high risks but offer you high potential returns. Returns are the gains or losses from security in a particular period and are usually quoted as a percentage (Carpenter, 2009). The kind of returns investors

## Efficient Market Hypothesis Proposed By Fama

1474 Words | 6 Pages1. Introduction and literature review Efficient market hypothesis proposed by Fama (1965) suggested that all relevant information is immediately incorporated into current stock prices. Moreover, stock prices change when new information come. Since new information is unpredictable, EMH implies that stock prices follow a random walk. Fama(1970) presented 3 forms of market efficiency including weak form , semi- strong form and strong form. These forms represent respectively level of information

## Cost Of Capital And Investor Expected Returns Essay

1821 Words | 8 PagesCOST OF CAPITAL AND INVESTOR EXPECTED RETURNS I. Cost of Capital (Equity) The cost of capital is the cost of resources used for financing a business. Depending on the method of financing, the cost of capital is financed solely through equity or debt. As a result, many companies use a combination of debt and equity to finance their businesses. Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting

## Essay about Real Estate Volatility Tests

832 Words | 4 Pagesresearch carried out on the risk and returns of real estate investments trusts (REIT). This study was done by Najand and Fitzgerald (2006, p.174) who studied the volatility and return for REITs between 1995 and 2003 with daily data where they found that they had an average beta of 0.24 and an abnormal return 2.25%. A study done by Chaudhry, Myer and Webb (1999, p.342) on real estate stocks, in the United States between the period 1978 and 1996, revealed that common stocks had an inverse long-run relationship

## Correlation Between Market Anomalies And Its Impact On The Economy

1370 Words | 6 Pagesto abnormal returns generated by momentum strategies. This paper fill the gap in literature because of two reasons : firstly, as original purpose, it provides a view on relative strength profitability ; secondly , I do not see many papers looking at relationship between market anomalies although momentum profits and limit to arbitrage have been strongly debated among studies. Barberis and Thaler (2003) presented 3 possible obstacles prevent arbitrageurs from taking advantages of stock mispricing

## Validity Of The Fama French Three Factor Model

2972 Words | 12 PagesFrench Three-Factor Model in China during 2011-2015 Validity of the Fama French Three-Factor Model in China during 2011-2015 Chao Xiong Ohio University Abstract This paper mainly explores the validity of the Fama-French Three Factors model during 2011-2015 by using 30 stocks which is from A-share stock market in China, in contrast to the results of Fama and French (1993) in U.S, there are some differences. Market risk premium has a significant in Chinese stock market, but

## Capital Asset Pricing Model and Arbitrage Pricing Theory

3608 Words | 14 PagesCapital Asset Pricing Model and Arbitrage Pricing Theory: Capital Asset Pricing Model (CAPM) is an arithmetical theory that describes the relationship between risk and return in a balanced market. The Capital Assets Pricing Model was autonomously and simultaneously developed by William Sharpe, Jan Mossin, and John Litner. The researches of these founders were published in three different and highly respected journal articles between 1964 and 1966. Since its inception, the model has been used in

## Risk Factor Based Portfolio Investment Strategies

1437 Words | 6 PagesINTRODUCTION INTO RISK-FACTOR BASED PORTFOLIO INVESTMENT STRATEGIES 1.1 What is factor-based investing? Consider one of the most urgent problems of modern financial management, namely portfolio management. Analysis of this issue primarily is interesting for the head of analytical department of banks and investment companies and private investors. Risk (also found in the literature, the term total risk) of stockssecurities is the uncertainty of its income at the end of the investment period. Risk is measured

### Critical Analysis of the Relative Merits of the Capital Asset Pricing Model (Capm) and the Fama and French (F&F) Three-Factor Model (Tfm)

2528 Words | 11 Pages### homework week 4 Essay

1138 Words | 5 Pages### Risk And Return Analysis : Notes

1158 Words | 5 Pages### Efficient Market Hypothesis Proposed By Fama

1474 Words | 6 Pages### Cost Of Capital And Investor Expected Returns Essay

1821 Words | 8 Pages### Essay about Real Estate Volatility Tests

832 Words | 4 Pages### Correlation Between Market Anomalies And Its Impact On The Economy

1370 Words | 6 Pages### Validity Of The Fama French Three Factor Model

2972 Words | 12 Pages### Capital Asset Pricing Model and Arbitrage Pricing Theory

3608 Words | 14 Pages### Risk Factor Based Portfolio Investment Strategies

1437 Words | 6 Pages