Common Risk Factors In The Returns On Stocks
Common Risk Factors in the Retu rns on Stocks and Bonds
Eugene F. Fama
Kenneth R. French
Journal of Financial Economics 1993
Presenter: 周立軒
Brief Saying…
• This paper identifies Five common risk factors in the return on stocks and bonds
– Two stock market factors, two bond market factors
, one market factor.
– The five factors seems to explain all returns in stoc k market and bond market
• Except the Low-Grade Bonds
Agenda
•
•
•
•
•
Introduction
The Steps of the Experiment
Data & Variables
Main Result
Conclusion
Introduction
• The market βs of Sharpe-Litner, and Breedon’s c onsumption βs show little relation of the Cross-S ectional average returns on U.S common stocks.
• Empirical variables determined average returns are: – Size, Leverage, E/P, BE/ME [Banz(1981), Bhandari(19
88), Basu(1983), and Rosenberg, Reid, and Lanstein(1
985)]
Introduction
• If the market is aggregated, there must be so me common factors which can explain both t he common stock market and bond market .
• But for bond market, the factors used to explai n common stock market may not appropriate.
– So, the new variables are introduced in this paper
The Steps for the Experiment
Choose the Data from Database
Sort the data by
“Size” and “BE/ME”
Test the bond factors on market excess return
Test the market factors on market excess return
Test the stock factors on market excess return
Test the stock factors + market factors on market excess return
Test all factors on market excess return Test the adjusted market factors on market excess return To be continued…
Data & Variables
• Data
– From 1963 to 1991
– At least appeared on COMPUSTAT for two years
– Stock price in December on t-1 year and June on t year in CRSP, and book equity in December on t-1 year on COMPUSTAT
Data &Variables
BE/ME
SIZE
Divided by
Median of NYSE
Lowest
30%
Medium
40%
Highest
30%
LOW
MEDIAN
HIGH
SMALL
S/L
S/M
S/H
BIG
B/L
B/M
B/H
Data &Variables
• In experiment, the sample will separate
Eugene F. Fama
Kenneth R. French
Journal of Financial Economics 1993
Presenter: 周立軒
Brief Saying…
• This paper identifies Five common risk factors in the return on stocks and bonds
– Two stock market factors, two bond market factors
, one market factor.
– The five factors seems to explain all returns in stoc k market and bond market
• Except the Low-Grade Bonds
Agenda
•
•
•
•
•
Introduction
The Steps of the Experiment
Data & Variables
Main Result
Conclusion
Introduction
• The market βs of Sharpe-Litner, and Breedon’s c onsumption βs show little relation of the Cross-S ectional average returns on U.S common stocks.
• Empirical variables determined average returns are: – Size, Leverage, E/P, BE/ME [Banz(1981), Bhandari(19
88), Basu(1983), and Rosenberg, Reid, and Lanstein(1
985)]
Introduction
• If the market is aggregated, there must be so me common factors which can explain both t he common stock market and bond market .
• But for bond market, the factors used to explai n common stock market may not appropriate.
– So, the new variables are introduced in this paper
The Steps for the Experiment
Choose the Data from Database
Sort the data by
“Size” and “BE/ME”
Test the bond factors on market excess return
Test the market factors on market excess return
Test the stock factors on market excess return
Test the stock factors + market factors on market excess return
Test all factors on market excess return Test the adjusted market factors on market excess return To be continued…
Data & Variables
• Data
– From 1963 to 1991
– At least appeared on COMPUSTAT for two years
– Stock price in December on t-1 year and June on t year in CRSP, and book equity in December on t-1 year on COMPUSTAT
Data &Variables
BE/ME
SIZE
Divided by
Median of NYSE
Lowest
30%
Medium
40%
Highest
30%
LOW
MEDIAN
HIGH
SMALL
S/L
S/M
S/H
BIG
B/L
B/M
B/H
Data &Variables
• In experiment, the sample will separate