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Reconciling The Characteristics Vs. Factors Models For Explaining Stock Returns, Brian C. Payne Lt Col, Jeffery Scott Bredthauer
Reconciling The Characteristics Vs. Factors Models For Explaining Stock Returns, Brian C. Payne Lt Col, Jeffery Scott Bredthauer
Finance, Banking and Real Estate Faculty Publications
Daniel and Titman (DT) (1997) disclaim the Fama-French three factor model in favor of a firm characteristics based model to explain stock returns. Davis, Fama, and French (2000) find this characteristics-based model outperforms their model only for the 20.5 year time period from July 1973-December 1993, but the three factor model is robust for the 68-year period from 1929- 1997. We find the DT period represents a unique macroeconomic environment in that significant interaction effects exist between the default (and term) risk premia innovations and returns. Incorporating these effects into a traditional three-factor model help explain the 1973-1993 “characteristics model …