Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis

Aharoni, Gil; Grundy, Bruce D.; Zeng, Qi

doi:10.1016/j.jfineco.2013.08.003

Cited by 149 publications

(41 citation statements)

References 20 publications

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“…Regardless of the frequent use of the FF3 model, there is evidence to suggest that it cannot completely explain the cross-section of stock returns 1 . Although FF3 model adjusts for outperformance tendency observed in original CAPM, academics question its ability to explain the cross-sectional variation in expected returns particularly related to profitability and investment (as seen in Chen et al, 2011;Aharoni et al, 2013;Novy-Marx, 2013;Walkshäusl and Lobe, 2014;Titman et al, 2004 among others). Motivated by this, Fama and French, (2015) propose five factor model which adds two additional factors, profitability and investment, to the FF3 model.…”

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confidence: 99%

US sector rotation with five-factor Fama–French alphas

2017

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In this paper we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama-French five factor model. We find that fivefactor model fits better the returns of US sector portfolios than the three factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test if such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S&P500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is ten-fold that of the buy-and-hold. The long-short strategy fares less well.

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confidence: 99%

US sector rotation with five-factor Fama–French alphas

2017

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“…Investment (INV) is the change in total asset between years t-2 and t-1 divided by the total asset of year t-2. Variables were measured at company level, following the orientation by Aharoni, Grundy and Zeng (2013). percentile, median, 75 th percentile and the coefficient of variation (CV).…”

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confidence: 99%

Applicability of Investment and Profitability Effects in Asset Pricing Models

2017

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ResumoEste estudo teve por objetivo investigar se investimento e rentabilidade são precificados e se explicam parcialmente as mudanças dos retornos das ações no mercado de capitais brasileiro, conforme o modelo de cinco fatores de Fama e French (2015). Por meio de regressões em série temporal e em cross-section, observou-se que B/M, momento e liquidez, são associados com os retornos das ações, enquanto que investimento e rentabilidade não apresentaram significância. Observou-se, também, que não existe prêmio por investimento no Brasil. Portanto, motivado pelo desempenho do B/M, do momento e da liquidez para o mercado brasileiro, bem como pelo fraco desempenho da rentabilidade e do investimento, pode-se constatar que o modelo de cinco fatores de Keene e Peterson (2007) apresentou desempenho superior a todos os outros modelos, especialmente quando comparado ao modelo de cinco fatores de Fama e French (2015).Palavras-chave: modelos de precificação de ativos; rentabilidade; investimento; liquidez. AbstractThis study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French's (2015) five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson's (2007) five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015).

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“…We follow Bessembinder and Zhang (2013) and implement a regression model to investigate the effects of firm characteristics on the long-run stock returns of our sample groups from Table 1 from March 2000 until December 2012. We consider nine characteristics that have been shown to be associated with average stock returns: market Beta (Sharpe, 1964;Lintner, 1965;Mossin, 1966), size (Banz, 1981), book-to-market (Rosenberg, Reid and Lanstein, 1985), momentum (Jegadeesh, 1990;Lehmann, 1990;Jegadeesh and Titman, 1993;Chan, Jegadeesh and Lakonishok, 1996;Novy-Marx, 2012), illiquidity (Amihud, 2002), gross profitability (Novy-Marx, 2013), investment (Aharoni, Grundy and Zeng, 2013), idiosyncratic volatility (Goyal and Santa-Clara, 2003;Bali, Cakici, Yan and Zhang, 2005;Zhang, 2006, 2009;Chen and Petkova, 2012), and expected idiosyncratic skewness (Boyer, Mitton and Vorkink, 2010). Due to the high IPO activity among Internet and technology stocks, many of our sample firms have only short histories of prices and fundamentals at the start of our sample period in March 2000.…”

Section: Bessembinder and Zhang Approachmentioning

confidence: 99%