Are Value and Size Fundamentals Proxies for the Systematic Risk Factors?

42 Pages Posted: 27 Feb 2011

See all articles by Kateryna Shapovalova

Kateryna Shapovalova

Université Paris I Panthéon-Sorbonne; Paris School of Economics (PSE)

Alexander Subbotin

Renaissance Finance

Thierry Chauveau

National Center for Scientific Research (CNRS)

Date Written: February 26, 2011


Many papers claim that value and size fundamentals (book-to-price ratios and market capitalization) yield positive expected return premia because they are proxies for systematic risk factors in conditional and/or multi-factor CAPM. Much of empirical evidence to support this idea comes from cross-sectional regressions on the Fama and French characteristics-sorted portfolios. We test if, on the individual stock level, the premia on the value, size and other characteristics can be explained by the betas to the systematic risk factors. Our inference is based on a random coefficient panel data model. Confirming the findings of earlier literature, we report that premia on company fundamentals are correlated with shocks to macroeconomic factors. Company characteristics also help to forecast future returns covariances with these indicators. However, these covariances by themselves do not have sufficient explicative power over the panel of stock returns, so that the premia on the company characteristics cannot be attributed to their omission from the model. We conclude that there is no reliable evidence in favor of the risk-based explanations of the excess returns on company fundamentals.

Keywords: Stock Returns, Asset Pricing, Value Puzzle, Three-Factor Model, Company Fundamentals

JEL Classification: G10, G12, G14

Suggested Citation

Shapovalova, Kateryna and Subbotin, Alexander and Chauveau, Thierry, Are Value and Size Fundamentals Proxies for the Systematic Risk Factors? (February 26, 2011). Available at SSRN: or

Kateryna Shapovalova (Contact Author)

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014

Alexander Subbotin

Renaissance Finance ( email )

9, chemin Pierre de Ronsard
Courbevoie, 92400

Thierry Chauveau

National Center for Scientific Research (CNRS) ( email )

3, rue Michel-Ange
Paris cedex 16, 75794
33 1 44 07 82 68 (Phone)
33 1 44 07 82 70 (Fax)

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