Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)
CRSP Working Paper No. 614
We study how migration of firms across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely due to the small stocks that earn extreme positive returns and as a result become big stocks. The value premium has three sources: (i) value stocks that improve in type either because they are acquired by other firms or because they earn high returns and so migrate to a neutral or growth portfolio; (ii) growth stocks that earn low returns and as a result move to a neutral or value portfolio; and (iii) slightly higher returns on value stocks that remain in the same portfolio compared to growth stocks that do not migrate.
Number of Pages in PDF File: 24
Keywords: Size premium, value premium, average returns
JEL Classification: G12working papers series
Date posted: August 28, 2006
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