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Fama &French (1992) The Cross Section of Expected

Stock Return

Research Question
The relation between beta and cross
sectional return is flat; can the variation
in average return be explained by
variables such as size, market value,
leverage, earning-price ratio etc?

Banz (1981) discovers that size can be used in

explaining average stock return because it appears
that average return on small stock is too high
despite their low and it is usually too low on large
stock. This may be used as an explanatory variable.
Bhandari (1988) finds that leverage has explanatory
power on average stock return and it is not captured
by stock beta as it theoretically should be.
Statman (1980) shows that average return is
positively related to the ratio of a firms book value
to common equity.
Basu (1983) shows that earning per share ratio can
also be used in explaining average return.

Main Results of the Study!

Beta does not seem to help explain
cross section of average return,
Although leverage and E/P may have
explanatory power when tested
alone their effect is dominated by
size and book-to-market variables.
This leads to the conclusion that risk
might be captured by these two

Data & Methodology

All the nonfinancial firms that are
listed in NYSE, AMEX and NASDAQ
whose data is available in CRSP from
1963 to 1990.
NYSE is as used as the market
portfolio proxy.
Cross sectional regressions

Methodology Cont
Form 10 size based portfolio and rank them,
Due to -0,98% correlation between size and
subdivide each group into 10 subgroups
based on their , unrelated to the size,
Calculate 12 month return using monthly
returns on each portfolio and find the average
return for full period,
Calculate betas via time series regression
over the whole period (330 months),
Run a cross sectional regression.

Apperantly has no significant

explanatory power!
Size related 10 portfolios show strong
relation to beta but when 10 beta
based sub portfolios are formed there is
no significant relation observed.
Maybe it is because other explanatory
variables are correlated with and this
obscures the true relationship.
Due to noise in beta calculation.

Jagadeesh & Titman (1993) Return to Buying Winner and

Selling Losers

Research Question
Is momentum strategy, which
involves buying past winners selling
the past losers a valid strategy?
Can profitable trading strategies be
constructed using momentum

Data & Methodology

Relative strength trading strategy is
analyzed based on price movement
of last 3 to 12 month period.
The data, which covers from 1965 to
1989 is from NYSE and AMEX.

Methodology Cont

If the stock prices over/underreact to info

then profitable trading strategies based on
past returns can be constructed.
Accordingly, based on stock returns over
the last 1, 2, 3, and 4 quarters portfolios
are formed.
These portfolios are held from 1 to 4
quarters in length, in total 16 different
strategies examined.
The same 16 strategies are conducted
with a week lag between formation period
and holding period.

Main Results of the Study

All of the strategies generate positive
The stocks that generate significant
abnormal return start losing value
around 12 months after the portfolio
formation, and this trend continues
up to 30 months, which indicates
mean reverting behavior,
The same behavior is observed
around earning announcement.

Main Results of the Study

The most profitable strategy is 12 months observation and 3
months holding, generates 1.31% monthly return. The same
strategy w/ a week lag provides 1.49% per month.
In each five year period from 1965 to 1989 just once the
average return is not significant in 1975-79 due to heavy
January effect.
After the formation date first 12 month significant positive
return which completely disappears after the 36th month.
Beta (change in the riskiness of stock) cannot explain this
phenomenon bc although beta changes- it went up during this
Prior period 1941 to 1964 display similar pattern though not as
From 1980 to 1989 the strategy is tested around earning
announcement, and on average winners generate 0,7% more
than losers almost every month.

Average Size and Beta of the

Is it possible that winner Ps include high
risk stocks systematically, or maybe size
effect in place??
It turns out that on average of past losers
is greater than of past winners.
Highest and lowest past return Ps are
smaller than average Ps in market
Evidently, abnormal return is not due to
risk or size!

Consider Serial Covariance of 6month Return

Is the source of abnormal return
serial correlation between 6-month
If yes we should observe positive
correlation but in reality it is only
-0,0028 which disproves the idea
that serial correlation may be
causing the abnormal return.

Profitability of Relative Strength

Strategies Within Size- and Betabased subsamples

Stocks in 6 month/6month strategy are separated

into 3 groups based on their beta and their size
(Size: small-medium-big) and (beta: low-mediumhigh). This way the effect of size and beta will be
observed if it exists.
To further test the sub groups CAPM model is
applied for portfolio return, winners minus losers,
comes out to be significant (t=3,84) for both
winners and losers.
It turns out that return on subsamples formed
based on beta and size is similar to that of other

Seasonal Effect??
It appears that only in the month of
January momentum strategy losses its
magnitude (almost 7% decreases in
average return) but generates positive
abnormal return in the rest of the year.
Results indicate that every year in April
maybe due to the fact that companies
transfer money to pension funds the
strategy consistently generates around
3% average monthly return.

Thank you!