UK Evidence on the Characteristics versus Covariance Debate

15 Pages Posted: 15 Aug 2007

See all articles by Weimin Liu

Weimin Liu

Nottingham University Business School

Edward Lee

University of Manchester - Alliance Manchester Business School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Abstract

We evaluate the Fama-French three-factor model in the UK using the approach of Daniel and Titman (1997) to determine whether characteristics or covariance risk better explains the size and value premiums. Across all three factors, we find that return premiums bear little relationship to the corresponding loadings. We show that small and value stocks earn higher returns irrespective of their return covariance. Our study contributes to the existing literature by reporting original findings on the Fama-French three-factor model in the UK and by reporting results that complement existing evidence from similar studies in the USA and Japan.

Suggested Citation

Liu, Weimin and Lee, Edward and Strong, Norman Charles, UK Evidence on the Characteristics versus Covariance Debate. European Financial Management, Vol. 13, No. 4, pp. 742-756, September 2007. Available at SSRN: https://ssrn.com/abstract=1006914 or http://dx.doi.org/10.1111/j.1468-036X.2007.00381.x

Weimin Liu

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Norman Charles Strong (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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