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Book-to-Market and Size Effect: Compensations for risks or outcomes of market inefficiencies

Asgharian, Hossein LU and Hansson, Björn LU (2010) In European Journal of Finance 16(2). p.119-136
Abstract
We employ the optimal orthogonal portfolio approach to investigate if the size and book-to-market effects in US data are related to risk factors beside the market risk. This method enables us to estimate the upper limit of the risk premium, due to observed as well as all possible unobserved factors, which can be derived from a linear asset pricing model. As a corollary, it is possible to divide the observed average asset return into three parts: one explained by the market factor, one due to the unobserved factors, and finally the non-risk-based (NRB) component. Our empirical results confirm the existence of latent risk factors, which cannot be captured by the market index. In particular, the size effect is related to some other background... (More)
We employ the optimal orthogonal portfolio approach to investigate if the size and book-to-market effects in US data are related to risk factors beside the market risk. This method enables us to estimate the upper limit of the risk premium, due to observed as well as all possible unobserved factors, which can be derived from a linear asset pricing model. As a corollary, it is possible to divide the observed average asset return into three parts: one explained by the market factor, one due to the unobserved factors, and finally the non-risk-based (NRB) component. Our empirical results confirm the existence of latent risk factors, which cannot be captured by the market index. In particular, the size effect is related to some other background risk factors than the market portfolio, but a large part of observed book-to-market effect has a NRB explanation. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
asset pricing, orthogonal portfolio, CAPM anomalies, size effect, value, effect
in
European Journal of Finance
volume
16
issue
2
pages
119 - 136
publisher
Taylor & Francis
external identifiers
  • wos:000276096100002
  • scopus:77649133569
ISSN
1466-4364
DOI
10.1080/13518470802697279
language
English
LU publication?
yes
id
547bce14-1f55-4417-ad98-44aaafc3ce95 (old id 1388438)
date added to LUP
2009-04-20 12:27:30
date last changed
2018-05-29 12:28:36
@article{547bce14-1f55-4417-ad98-44aaafc3ce95,
  abstract     = {We employ the optimal orthogonal portfolio approach to investigate if the size and book-to-market effects in US data are related to risk factors beside the market risk. This method enables us to estimate the upper limit of the risk premium, due to observed as well as all possible unobserved factors, which can be derived from a linear asset pricing model. As a corollary, it is possible to divide the observed average asset return into three parts: one explained by the market factor, one due to the unobserved factors, and finally the non-risk-based (NRB) component. Our empirical results confirm the existence of latent risk factors, which cannot be captured by the market index. In particular, the size effect is related to some other background risk factors than the market portfolio, but a large part of observed book-to-market effect has a NRB explanation.},
  author       = {Asgharian, Hossein and Hansson, Björn},
  issn         = {1466-4364},
  keyword      = {asset pricing,orthogonal portfolio,CAPM anomalies,size effect,value,effect},
  language     = {eng},
  number       = {2},
  pages        = {119--136},
  publisher    = {Taylor & Francis},
  series       = {European Journal of Finance},
  title        = {Book-to-Market and Size Effect: Compensations for risks or outcomes of market inefficiencies},
  url          = {http://dx.doi.org/10.1080/13518470802697279},
  volume       = {16},
  year         = {2010},
}