Characteristics, Covariances, and Average Returns: 1929-1997
James L. Davis
Dimensional Fund Advisors Inc.
Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
Center for Research in Security Prices (CRSP) Working Paper No. 471
The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is, however, weaker and less reliable than the value premium. The relations between average return and firm characteristics (size and BE/ME) are better explained by a three-factor risk model than by the behavioral hypothesis that investor overreaction causes characteristics to be compensated irrespective of risk loadings.
Number of Pages in PDF File: 24
JEL Classification: G12
Date posted: August 12, 1998