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Consumption, Size and Book-to-Market Ratio in Equity Returns

Pongrapeeporn Abhakorn (), Peter Smith () and Michael Wickens

Discussion Papers from Department of Economics, University of York

Abstract: This study extends the standard consumption-based capital asset pricing model (C-CAPM) to include two additional factors related to firm size (SMB) and book-to-market value ratio (HML). The inclusion of HML improves mainly the fit of the low book-to-market portfolios, SMB, and HML that are not correctly priced in the standard C-CAPM. Consumption premium varies across size and coincides with the size effect. The effect of a HML premium is to reduce the amount of consumption premium, implying that low book-to-market ratio and, to a lesser degree, small portfolios are not as risky as consumption predicts. The HML premium across size is contradictory to the size effect as small firms have a larger negative HML premium.

Keywords: Risk Premium; Equity Return; Stochastic Discount Factor; Consumption (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 G14 (search for similar items in EconPapers)
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Related works:
Journal Article: What do the Fama–French factors add to C-CAPM? (2013) Downloads
Working Paper: What do the Fama-French factors add to CCAPM? (2013) Downloads
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