UK Evidence on the Characteristics versus Covariance Debate

Edward Lee, Weimin Liu and Norman Strong

European Financial Management, 2007, vol. 13, issue 4, 742-756

Abstract: We evaluate the Fama–French three‐factor model in the UK using the approach of Daniel and Titman (1997) to determine whether characteristics or covariance risk better explains the size and value premiums. Across all three factors, we find that return premiums bear little relationship to the corresponding loadings. We show that small and value stocks earn higher returns irrespective of their return covariance. Our study contributes to the existing literature by reporting original findings on the Fama–French three‐factor model in the UK and by reporting results that complement existing evidence from similar studies in the USA and Japan.

Date: 2007
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https://doi.org/10.1111/j.1468-036X.2007.00381.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:eufman:v:13:y:2007:i:4:p:742-756

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