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FF risk story
Robert T 04-10-2007, 11:37 AM | Post #2371723 | 
To try to summarize the FF side of the story:

I think this section by Fama and French in "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, 1996 captures their views on the risk story.

"FF (1993) interpret the average HML return as a premium for a state variable risk related to relative distress. This story is suggested by the evidence in FF (1995) that low book-to-market-equity is typical of firms that have persistently strong earnings, while high-BEME is associated with persistently low earnings. Moreover, FF (1994) argue that the variation through time in the loadings of industries on HML correctly reflects periods of industry strength or distress. Industries have strong positive HML loadings in bad times and negative loadings when times are good. Finally, Chan and Chen (1991) present evidence for a risk factor in returns and average returns related to relative distress."

The references mentioned in the section are:

1. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993

2. Size and book-to-market factors in earnings and returns. Journal of Finance 1995.

3. Industry costs of equity (1994). Subsequently came out in Journal of Financial Economics 1997.

4. Structural and return characteristics of small and large firms. Journal of Finance 1991. (Chan and Chen),

Investors can choose to accept or reject their views. For those interested, I think the above mentioned articles are useful reads (I found them fascinating.and fairly accessible [not too technical and equation ridden]).


Originally posted in thread: 58474
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