1 / 6

Additional slides on FF

Additional slides on FF. Chapter 11.3. SMB and HML. Average SMB > 0 over the long term Average HML > 0 over the long term Why should there be a size premium (i.e., why should small-cap stocks have a higher return over the long term)?. Why is there a value premium?.

rocio
Télécharger la présentation

Additional slides on FF

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Additional slides on FF Chapter 11.3

  2. SMB and HML • Average SMB > 0 over the long term • Average HML > 0 over the long term • Why should there be a size premium (i.e., why should small-cap stocks have a higher return over the long term)?

  3. Why is there a value premium? • Why should value (high B/P) stocks have a higher return than growth (low B/P) stocks over the long term? • Explanations from two different schools of thought • Chicago school • Risk-based explanation • Behavioural finance

  4. Chicago School • No free lunch plan • In an efficient market, there is always a risk/return tradeoff • If a premium exists for value stocks, it must be because they are riskier • However, their standard deviations (of returns) are typically not higher than that of growth stocks • Fama-French’s verbal explanation: value stocks are in distress (earnings are temporarily depressed), and therefore riskier

  5. Risk-Based Explanations • Petkova and Zhang (2005), Zhang (2005) • Allow beta to vary over time, in particular, over the business cycle, in their model • Value companies have greater amounts of tangible capital, and the latter tends to be irreversible (difficult to scale back, or difficult to divest). Hence: • In a recession, value firms suffer from excess capacity • During market downturns, value stocks have more systematic risk • Value stocks are therefore riskier in this sense

  6. Behavioural Explanation • Behavioural finance will be covered in the last class • Explains why growth stocks underperform • Investors overreact to “glamour” stocks • High valuations not justified or sustainable • Bubble eventually bursts

More Related