Download this Paper Open PDF in Browser

Expected Returns and Volatility of Fama-French Factors

Charles A. Dice Center Working Paper No. 2009-17

Fisher College of Business Working Paper No. 2009-03-017

55 Pages Posted: 22 Oct 2009  

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Date Written: September 25, 2009

Abstract

In this paper, I show that the variance of Fama-French factors, the variance of the momentum factor, as well as the correlation between these factors, predict an important fraction of the time-series variation in post-1990 aggregate stock market returns. This predictability is particularly strong from one month to one year, and it dominates that afforded by the variance risk premium and other popular predictor variables such as P/D ratio, the P/E ratio, the default spread, and the consumption-wealth ratio. In a simple representative agent economy with recursive preferences, I model the portfolio weight in each asset as a function of a stock’s characteristics and show that the market return can be predicted by these variances.

Keywords: predictability, stock returns, volatility of Fama-French factors, variance risk premium

JEL Classification: C22, C51, C52, G12, G13, G14

Suggested Citation

Chabi-Yo, Fousseni, Expected Returns and Volatility of Fama-French Factors (September 25, 2009). Charles A. Dice Center Working Paper No. 2009-17; Fisher College of Business Working Paper No. 2009-03-017. Available at SSRN: https://ssrn.com/abstract=1485707 or http://dx.doi.org/10.2139/ssrn.1485707

Fousseni Chabi-Yo (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Paper statistics

Downloads
239
Rank
107,880
Abstract Views
1,941