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Korean Journal of Financial Studies 2009;38(3):289-323.
Published online September 30, 2009.
Explaining the Cross-section of Stock Returns: Characteristics or Risk Factors
Sang Whan Kim
우리나라 주식수익률의 결정요인
Fama and French (1992) found the fact that size and book-to-market equity combine to capture the cross-sectional variation in average stock returns. Fama and French (1993) view the world as rational, and that the existence of size and book-to-market (or value) premiums is due to some distress factors. In other words, the return premia associated with firm characteristics are compensation for risk. Contrarily, Daniel and Titman (1997) argue in favor of a characteristics-based model in which the premium to value stocks and small stocks is due to something captured by firm characteristics not the loadings to risk factors. They suggest that Fama-French model appears to explain average returns only because the factor loadings are correlated with firms` characteristics (size and B/M). The objective of this paper is to provide further evidence on the risk vs. characteristics debate by examining Korean stock returns in the 1988 to 2007 period. In the first test, we formed zero cost portfolios that are characteristic-balanced but are sensitive to the risk factor. The first formal test cannot reject the characteristic model. Another testing procedure using intercept estimates from the Fama-French regression of characteristic-balanced portfolios, however, rejects the factor model. The main implications of this paper are as follows. First, researchers should be cautious in applying the Fama-French model as a risk benchmark. Second, when evaluating portfolio performance, controlling for risk by matching sample firms with control firms of similar book-to-market and size is likely to be more appropriate than using abnormal return measured from the Fama-French model.
Key Words: 요인모형,위험요인에 대한 민감도,자산가격결정,특성모형,행태재무이론,Asset Pricing Model,Behavioral Finance,Characteristic Model,Factor Model,loading,Risk Loadings
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