This study explores the magnitude of size and value premium in the UK using the various methods of estimating SMB and HML used in the past on UK data. I identify nine distinct methods that previous researchers have used to estimate the factors. I then estimate them, following as closely as possible the descriptions given in the relevant papers, on data from July 1980 to April 2003. I find that the method used to construct the size and value premium affects their magnitude and significance. I, then, use a variety of asset-pricing tests to examine whether the estimated factors capture risk effects and, combined with the market factor, explain returns for sets of portfolios. Consistent with the US evidence, I show that the Fama and French model outperforms the CAPM model in the UK: Moreover, I find that the HML is the dominant risk factor in the UK while the 5MB is generally insignificant. Next, I consider the macroeconomic story for the size and BM effects. My purpose is to clarify the extent to which Fama-French factors contain information about the macroeconomy. I find that three out of four sets of Fama-French factors - that come with positive and significant risk premium on HML from the cross-sectional regressions support the U.S. evidence that HML contains default-related information, consistent with Vassalou and Xing (2004). However, only one set of factors shows that shocks to IP growth is a significant risk factor but contains different information from the HML factor, in contrast to the Vassalou (2003) and Liew and Vassalou (2000) findings for the U.S. Further, I compare the pricing performance of four asset pricing models with respect to their abilities to explain the cross-sectional variation in different sets of portfolios' excess returns. I find that the Fama-French model explains the cross-section of average returns on portfolios sorted on size and BM ratio better than both the Vassalou model and the Macroeconomic model for the 16 intersected size and BM portfolios and for the set of 36 combined portfolios. However, the result is mixed regarding the 20 industry portfolios. I conclude that given the absence of 'industry standards' for 5MB and HML construction in the UK and my findings of a real difference between the outcomes of applying different sets of factors, caution needs to be taken when adopting just one of the combinations of Fama-French factors and then drawing inferences accordingly. Moreover, I stress the need for more research to uncover the full information content of Fama-French factors.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:487924 |
| Date | January 2008 |
| Creators | Mouselli, Sulaiman |
| Publisher | University of Manchester |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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