Scribd
Upload
32 views32 pages

Seminar in Finance MS (Finance) - Value and Size Factors: Instructor Dr. Hilal Anwar Butt

This seminar focuses on value and size factors in finance. It will examine various explanations for why value stocks tend to have higher returns than growth stocks and why small-cap stocks tend to outperform large-cap stocks. Students will analyze and present on papers relating to value and size factors and conduct empirical analyses using univariate and bivariate portfolio sorts and Fama-MacBeth regressions to further investigate these effects.

Uploaded by

Fahad Hameed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
32 views32 pages

Seminar in Finance MS (Finance) - Value and Size Factors: Instructor Dr. Hilal Anwar Butt

This seminar focuses on value and size factors in finance. It will examine various explanations for why value stocks tend to have higher returns than growth stocks and why small-cap stocks tend to outperform large-cap stocks. Students will analyze and present on papers relating to value and size factors and conduct empirical analyses using univariate and bivariate portfolio sorts and Fama-MacBeth regressions to further investigate these effects.

Uploaded by

Fahad Hameed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 32

Seminar in Finance

MS (Finance).
Value and Size Factors

Instructor
Dr. Hilal Anwar Butt
Seminar Outline
• Importance of the Value and Size Factors?
• Various explanations for the Value and Size factors.
• Construction criteria to be used as predictor.
• Value and Size factors and other predictors.
• Univariate portfolios based on Value and Size.
• Bivariate analysis and Value and Size factors.
• Fama-MacBeth Regression and the economic significance of the Value
and Size for expected returns.
• Value and Size factors and risk based explanations.
Value Stock ???
• Value stocks are loosely defined as the stocks that have lower
prices in comparison to their earnings (Basu (1977), Jaffe, Keim,
and Westerfield (1989)), to the dividends (Lakonishok, Shleifer,
and Vishny (1994)), debt (Bhandari (1988)), or the book value of
equity (Rosenberg, Reid, and Lanstein (1985), Fama and French
(1992, 1993), Chan, Jegadeesh, and Lakonishok (1995)).
• Empirical evidence is that value stocks have higher expected
future returns in comparison to the growth stocks.
• Fama and French (1992) show that the ratio of the book value of
equity to the market value of equity represent the value stocks
better.
Why Value Premium Exists.
• The interpretation of the value premium is yet controversial and there
is no definite answer to that.
• The first set of explanation is the risk based and is proposed by Fama and
French (1993) and Chen and Zhang (1998).
• Higher and the lower returns of the value and growth stocks are a result of
higher and lower exposure to a priced risk factor.
• Book-to-market ratio proxy for the latent fundamental-based risk factors. Because
such firms have persistent lower earnings, higher earning uncertainty and high
leverage.
• Value premium can be explained by time-varying risk and risk-premia (Lettau and
Ludvigson (2001), Zhang (2005)).
• Economic conditions and the value based premium Fama and French (1995).
Continued…
• The second set of explanation is behavioral and attributed to Lakonishok,
Shleifer, and Vishny (1994). La Porta (1996) and La Porta, Lakonishok, Shleifer,
and Vishny (1997).
• The propose that the returns associated with value investing are due to naïve
investor expectations of future growth.
• Systematic error in estimating future earnings of the firms results in the
mispricing.
• Optimism and pessimism.
• Overpricing and underpricing.
• Similarly, extreme losers outperform the market in subsequent years, De
Bondt and Thaler (1985, 1987), Chopra, Lakonishok, and Ritter (1992)).
• Distress risk effect and mispricing by Griffin and Lemmon (2002). Then Ali,
Hwang, and Trombley (2003), value effect and unsophisticated investors.
Paper Review by Students.
Articles Students
Basu (1977). Asif and Zainab
Jaffe, Keim, and Westerfield (1989). Atiq and Bilal
Lakonishok, Shieifer, and Vishny (1994). Shahbaz and Masood
Rosenberg, Reid, and Lanstein (1985). Das and Das
Chan, Jegadeesh, and Lakonishok (1995). Midhat and Maryam
La Porta, Lakonishok, Shieifer, and Vishny (1997). Arbaz and Alisba
De Bondt and Thaler (1985). Ifrah and Mobeen
Chopra, Lakonishok, and Ritter (1992). Imran
Griffin and Lemmon (2002) . Zehra and Fahad
Calculation of Book-To-Market Ratio.
Summary Statistics and Correlations.
Persistence.
• Why checking persistence is important within the context of risk-based
explanation and of mispricing.
Book-to-Market Ratio and Stock Returns.
• Univariate Portfolio Analysis.
Bivariate Dependent-Sort Portfolio Analysis
Continued…..
Bivariate Independent-Sort Portfolio Analysis.
BM and Betas
Continued….
BM and Market Capitalization.
• Equally Weighted.
Continued…
• Value weighted.
Portfolio Characteristics for IV
Self-Reading.
• Calculation of Book-To-Market Ratio (177 to 181).
• What difference does it make once we use NYSE/AMEX/NASDAQ
stocks as breakpoints for portfolio construction and when we use only
NYSE breakpoints (General Reading).
• Read Fama and French Three-Factor Model (Pages 202-203).
Fama-MacBeth Regression (1973).
• Within this framework we can analyze the relationship between the
𝐵𝑀 𝑖,𝑡 and future returns while controlling for other variables. Instead
of using just one variable as we did in bivariate portfolio construction.
• There are number of FM regression analyses conducted using the
cross-section regressions specification that includes,𝐵𝑀 𝑖,𝑡 along with
others variables, such as, beta and market capitalization.
• In next slide we see the regression out-put and its economic
interpretation.
Table 10.8 Fama and Mac-Beth Regressions
Interpretation of these results.
The Value Factor
• Fama and French (1993) Value Factor HML.
• Construction of the Value factor Factor.

L (low BM) N H (High BM)


Small (S) SL SN SH
Big (B) BL BN BH

• HML = (SH+BH)/2 – (SL+BL)/2


• SML = (SL+SN+NH)/3 – (BL+BN+BH)/3
The Value Factor.
What is Size Effect.
• Size effect refers to the observation that the stocks with larger
capitalizations tend to have lower returns than the stocks with the
small market capitalization.
• Fama and French (1992, 1993) are the most cited papers but this
observation was for the first time made by Banz (1981) and then by
Lakonishok and Shapiro (1986).
• Fama and French (2012) find the evidence of a size effect in
international equity markets.
• Fama and French (1993) constructed the size factor SMB and used it
along with HML as a risk factor in their famous three factor model
that performed better than CAPM.
Summary Statistics
• Market capitalization for any firm is simply the product of number of
shares outstanding into its price.
Inflation adjustment and Logarithm
Big firms effect.
Correlation and Persistence
Univariate Portfolio Analysis.
Continued….
Reversal
reversal 1
0.06

0.05

0.04

0.03

0.02

0.01

0
M1 M2 M3 M4 M5
Time gap increased.
Reversal 2
0.035

0.03

0.025

0.02

0.015

0.01

0.005

0
M1 M2 M3 M4 M5

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy