https://rady.ucsd.edu/faculty/directory/valkanov/pub/classes/mfe/docs/fama_french_jfe_1993.pdf

Common risk factors in the returns on stocks and bonds

"...a blend of erudition (fascinating and sometimes obscure historical minutiae abound), popularization (mathematical rigor is relegated to appendices) and exposition (the reader need have little knowledge of the fields involved) ...and the illustrations include many superb examples of computer graphics that are works of art in their own right." Nature

The Fractal Geometry of Nature

Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene F. Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2325486 Accessed: 30/03/2010 21:28

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Efficient capital markets: a review of theory and empirical work*

Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.

http://www.business.unr.edu/faculty/liuc/files/badm742/fama_french_1992.pdf

The Cross‐Section of Expected Stock Returns

This paper tests the relationship between average return and risk for New York Stock Exchange common stocks. The theoretical basis of the tests is the "two-parameter" portfolio model and models of market equilibrium derived from the two-parameter portfolio model. We cannot reject the hypothesis of these models that the pricing of common stocks reflects the attempts of risk-averse investors to hold portfolios that are "efficient" in terms of expected value and dispersion of return. Moreover, the observed "fair game" properties of the coefficients and residuals of the risk-return regressions are consistent with an "efficient capital market"--that is, a market where prices of securities

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Risk, Return, and Equilibrium: Empirical Tests

This paper tests whether innovations in macroeconomic variables are risks that are rewarded in the stock market. Financial theory suggests that the following macroeconomic variables should systematically affect stock market returns: the spread between long and short interest rates, expected and unexpected inflation, industrial production, and the spread between high- and low-grade bonds. We find that these sources of risk are significantly priced. Furthermore, neither the market portfolio nor aggregate consumption are priced separately. We also find that oil price risk is not separately rewarded in the stock market.

Economic Forces and the Stock Market

There is an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly independent. Recent papers by Mandelbrot and Samuelson show rigorously that independence of successive price changes is consistent with an "efficient" market, i.e., a market that adjusts rapidly to new information. It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed independence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specijc kinds of new information. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split

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The Adjustment of Stock Prices to New Information

Despite many excellent research papers, we still do not fully understand the motives behind mergers and tender offers or whether they bring an increase in aggregate market value. In their comprehensive review article (from which the above quote is taken), Jensen and Ruback (1983) summarize the empirical work presented in over 40 The hubris hypothesis is advanced as an explanation of corporate takeovers. Hubris on the part of individual decision makers in bidding firms can explain why bids are made even when a valuation above the current market price represents a positive valuation error. Bidding firms infected by hubris simply pay too much for their targets. The empirical evidence in mergers and tender offers is reconsidered in the hubris context. It is argued that the evidence supports the hubris hypothesis as much as it supports other explanations such as taxes, synergy, and inefficient target management. * The earlier drafts of this paper elicited many comments. It is a pleasure to acknowledge the benefits derived from the generosity of so many colleagues. They corrected several conceptual and substantive errors in the previous draft, directed my attention to other results, and suggested other interpretations of the empirical phenomena. In general, they provided me with an invaluable tutorial on the subject of corporate takeovers. The present draft undoubtedly still contains errors and omissions, but this is due mainly to my inability to distill and convey the collective knowledge of the profession. Among those who helped were C. R. Alexander, Peter Bernstein, Thomas Copeland, Harry DeAngelo, Eugene Fama, Karen Farkas, Michael Firth, Mark Grinblatt, Gregg Jarrell, Bruce Lehmann, Paul Malatesta, Ronald Masulis, David Mayers, John McConnell, Merton Miller, Stephen Ross, Richard Ruback, Sheridan Titman, and, especially, Michael Jensen, Katherine Schipper, Walter A. Smith, Jr., and J. Fred Weston. I also benefited from the comments of the finance workshop participants at the University of Chicago, the University of Michigan, and Dartmouth College, and of the referees.

/pdf/the-hubris-hypothesis-of-corporate-takeovers-yrn8pk74q5.pdf

The Hubris Hypothesis of Corporate Takeovers

A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory

In an efficient market, the fundamental value of a security fluctuates randomly. However, trading costs induce negative serial dependence in successive observed market price changes. In fact, given market efficiency, the effective bid-ask spread can be measured by Spread=2−cov where “cov” is the first-order serial covariance of price changes. This implicit measure of the bid-ask spread is derived formally and is shown empirically to be closely related to firm size.

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Richard Roll

Papers

Economic Forces and the Stock Market

The Adjustment of Stock Prices to New Information

The Hubris Hypothesis of Corporate Takeovers

A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory

A Simple Implicit Measure of the Effective Bid‐Ask Spread in an Efficient Market