NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Kent Daniel, Sheridan Titman

NBER Working Paper No. 5604
Issued in June 1996
NBER Program(s):   CF

Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

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Document Object Identifier (DOI): 10.3386/w5604

Published: Journal of Finance, March 1997. citation courtesy of

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