University of Chicago - Booth School of Business
Juhani T. Linnainmaa
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
January 1, 2014
Fama-Miller Working Paper
Chicago Booth Research Paper No. 12-18
Size and book-to-market split into two components, one correlated with changes in market value and the other with everything else. Only the market value components have positive risk premia. Average returns are flat across portfolios based on the other parts, but their loadings on SMB and HML differ significantly. This mismatch between covariances and average returns generates significant alphas for high-minus-low portfolios. The estimated fraction of skilled fund managers increases from 4% to 18% when we control for the other parts. Also, the other part of value drives the negative correlation between gross profitability and value.
Number of Pages in PDF File: 48
Date posted: June 13, 2012 ; Last revised: January 21, 2014
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