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Can Recent Risk-Based Theories Explain the Value Premium?

29 Pages Posted: 16 Mar 2006  

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: September 2006

Abstract

This paper shows that some of the most prominent risk-based theories offered as explanation for the value premium are at odds with data. The models proposed by Fama and French (1993), Lettau and Ludvingson (2001), Campbell and Vuolteenaho (2004), and Yogo (2005) can capture the cross section of returns of portfolios sorted on book-to-market ratio and size, but not of portfolios sorted on book-to-market ratio and institutional ownership. These models generate economically large pricing errors in all the institutional ownership quintiles and each statistical test indicates that these pricing errors are significant. More generally, these results show that a minor alteration of the test assets can lead to a dramatically different answer regarding the validity of a given asset pricing model.

JEL Classification: G12, G14, G20

Suggested Citation

Phalippou, Ludovic, Can Recent Risk-Based Theories Explain the Value Premium? (September 2006). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=891091 or http://dx.doi.org/10.2139/ssrn.891091

Ludovic Phalippou (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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