The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings

Rodney L. White Center Working Paper No. 08-99

Posted: 18 Nov 1997

See all articles by Donald B. Keim

Donald B. Keim

University of Pennsylvania - Wharton School

Gabriel Hawawini

INSEAD - Finance

Abstract

A growing number of empirical studies suggest that betas of common stocks do not adequately explain cross-sectional differences in stock returns. Instead, a number of other variables (e.g., size, ratio of book to market, earnings/price) that have no basis in extant theoretical models seem to have significantly predictive ability. Some interpret the findings as evidence of market efficiency. Others argue that the Capital Asset Pricing Model is an incomplete description of equilibrium price formation and these variables are proxies for additional risk factors. In this paper we review the evidence on the cross-sectional behavior of common stock returns on the U.S. and other equity markets around the world. We also report some new evidence on these cross-sectional relations using data from both U.S. and international stock markets. We find, among other results, that although the return premia associated with these ad hoc variables are significant in most international stock markets, the premia are uncorrelated across markets. The accumulating evidence prompts the following question: If these return premia occur primarily in January and are uncorrelated across major international equity markets, is it reasonable to characterize them as compensation for risk?

JEL Classification: G12, G15

Suggested Citation

Keim, Donald B. and Hawawini, Gabriel, The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings. Rodney L. White Center Working Paper No. 08-99, Available at SSRN: https://ssrn.com/abstract=40640

Donald B. Keim (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7685 (Phone)
215-898-6200 (Fax)

Gabriel Hawawini

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
(33) (0)1 60 72 42 14 (Phone)
(33) (0)1 60 74 55 00/01 (Fax)

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