Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 29 Jan 1997

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

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Abstract

Firm sizes and book-to-market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arises because the characteristics are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross-sectional variation in stock returns.

JEL Classification: G34

Suggested Citation

Daniel, Kent D. and Titman, Sheridan, Evidence on the Characteristics of Cross Sectional Variation in Stock Returns. J. OF FINANCE, Vol. 52 No. 1, March 1997. Available at SSRN: https://ssrn.com/abstract=8079

Kent D. Daniel (Contact Author)

Columbia Business School - Finance and Economics ( email )

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Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

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United States
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512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

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United States

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