Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Kent Daniel and Sheridan Titman

Journal of Finance, 1997, vol. 52, issue 1, 1-33

Abstract: Firm sizes and book-to-market ratios are both highly correlated with the average returns of common stocks. Eugene F. Fama and Kenneth R. French (1993) argue that the association between these characteristics and returns arise because the characteristics are proxies for nondiversifiable factor risk. In contrast, the evidence in this article indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the comovements 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. Copyright 1997 by American Finance Association.

Date: 1997
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Working Paper: Evidence on the Characteristics of Cross Sectional Variation in Stock Returns (1996)
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