IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v46y2014i3p281-294.html
   My bibliography  Save this article

On the differences in measuring SMB and HML in the UK – Do they matter?

Author

Listed:
  • Michou, Maria
  • Mouselli, Sulaiman
  • Stark, Andrew

Abstract

The Fama–French (FF) three factor model expands the capital asset pricing model (CAPM) to include two additional factors to the market factor – SMB, employed to capture a firm size effect in returns and HML employed to capture book-to-market effects in returns. In the UK, different researchers use different ways of calculating SMB and HML in the context of empirical applications of the three factor model, or extensions of it, perhaps because they believe the differences in the construction of the SMB and HML factors to be relatively unimportant from an empirical standpoint. We investigate whether indeed factor construction methods are unimportant. Our conclusion is that they do matter.

Suggested Citation

  • Michou, Maria & Mouselli, Sulaiman & Stark, Andrew, 2014. "On the differences in measuring SMB and HML in the UK – Do they matter?," The British Accounting Review, Elsevier, vol. 46(3), pages 281-294.
    • Handle: RePEc:eee:bracre:v:46:y:2014:i:3:p:281-294
    DOI: 10.1016/j.bar.2014.03.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838914000316
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.bar.2014.03.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Antonios Antoniou & Emilios C. Galariotis & Spyros I. Spyrou, 2006. "Short‐term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 839-867, June.
    2. Fletcher, Jonathan, 2001. "An Examination of Alternative Factor Models in UK Stock Returns," Review of Quantitative Finance and Accounting, Springer, vol. 16(2), pages 117-130, March.
    3. Alan Gregory & Rajesh Tharyan & Angela Christidis, 2013. "Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(1-2), pages 172-214, January.
    4. Antonios Antoniou & Emilios C. Galariotis & Spyros I. Spyrou, 2006. "Short-term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 839-867.
    5. A. Al-Horani & P. F. Pope & A. W. Stark, 2003. "Research and Development Activity and Expected Returns in the United Kingdom," Review of Finance, European Finance Association, vol. 7(1), pages 27-46.
    6. Raymond Kan & Chu Zhang, 1999. "Two‐Pass Tests of Asset Pricing Models with Useless Factors," Journal of Finance, American Finance Association, vol. 54(1), pages 203-235, February.
    7. Rob Bauer & Mathijs Cosemans & Peter C. Schotman, 2010. "Conditional Asset Pricing and Stock Market Anomalies in Europe," European Financial Management, European Financial Management Association, vol. 16(2), pages 165-190, March.
    8. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 1-40, January.
    9. Weimin Lui & Norman Strong & Xinzhong Xu, 1999. "The Profitability of Momentum Investing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9-10), pages 1043-1091.
    10. Alan Gregory & Richard D.F. Harris & Maria Michou, 2001. "An Analysis of Contrarian Investment Strategies in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9‐10), pages 1192-1228, November.
    11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    12. Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-467.
    13. Jonathan Fletcher & David Forbes, 2002. "U.K. Unit Trust Performance: Does it Matter Which Benchmark or Measure is Used?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 21(3), pages 195-218, June.
    14. Alan Gregory, 1997. "An Examination of the Long Run Performance of UK Acquiring Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 971-1002.
    15. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    16. George Alexandridis & Antonios Antoniou & Dimitris Petmezas, 2007. "Divergence of Opinion and Post‐Acquisition Performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 439-460, April.
    17. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    18. Alan Gregory, 1997. "An Examination of the Long Run Performance of UK Acquiring Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 971-1002, September.
    19. Elisabeth Dedman & Sulaiman Mouselli & Yun Shen & Andrew W. Stark, 2009. "Accounting, Intangible Assets, Stock Market Activity, and Measurement and Disclosure Policy—Views From the U.K," Abacus, Accounting Foundation, University of Sydney, vol. 45(3), pages 312-341, September.
    20. Fletcher, Jonathan & Kihanda, Joseph, 2005. "An examination of alternative CAPM-based models in UK stock returns," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2995-3014, December.
    21. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    22. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    23. George Alexandridis & Antonios Antoniou & Dimitris Petmezas, 2007. "Divergence of Opinion and Post-Acquisition Performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3-4), pages 439-460.
    24. Alan Gregory & Richard D.F. Harris & Maria Michou, 2001. "An Analysis of Contrarian Investment Strategies in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9‐10), pages 1192-1228, November.
    25. Weimin Lui & Norman Strong & Xinzhong Xu, 1999. "The Profitability of Momentum Investing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9‐10), pages 1043-1091, November.
    26. Doron Avramov & Tarun Chordia, 2006. "Asset Pricing Models and Financial Market Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1001-1040.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. S. Ozornov, 2015. "Validity Of Fama And French Model On Rts Index," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 3(4), pages 22-43.
    2. Fletcher, Jonathan, 2018. "Betas V characteristics: Do stock characteristics enhance the investment opportunity set in U.K. stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 114-129.
    3. Ye, Qing & Turner, John D., 2014. "The cross-section of stock returns in an early stock market," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 114-123.
    4. Kathrin Tauscher & Martin Wallmeier, 2016. "Portfolio Overlapping Bias in Tests of the Fama–French Three†Factor Model," European Financial Management, European Financial Management Association, vol. 22(3), pages 367-393, June.
    5. Vendrame, Vasco & Guermat, Cherif & Tucker, Jon, 2018. "A conditional regime switching CAPM," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 1-11.
    6. Artmann, Sabine & Finter, Philipp & Kempf, Alexander, 2010. "Determinants of expected stock returns: Large sample evidence from the German market," CFR Working Papers 10-01, University of Cologne, Centre for Financial Research (CFR).
    7. Sebastien Valeyre, 2020. "Refined model of the covariance/correlation matrix between securities," Papers 2001.08911, arXiv.org.
    8. Du, Ding, 2013. "Another look at the cross-section and time-series of stock returns: 1951 to 2011," Journal of Empirical Finance, Elsevier, vol. 20(C), pages 130-146.
    9. J. Davies & Jonathan Fletcher & Andrew Marshall, 2015. "Testing index-based models in U.K. stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 337-362, August.
    10. Alan Gregory & Maria Michou, 2009. "Industry Cost of Equity Capital: UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 679-704, June.
    11. Chou, Pin-Huang & Ho, Po-Hsin & Ko, Kuan-Cheng, 2012. "Do industries matter in explaining stock returns and asset-pricing anomalies?," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 355-370.
    12. James Foye, 2018. "Testing alternative versions of the Fama–French five-factor model in the UK," Risk Management, Palgrave Macmillan, vol. 20(2), pages 167-183, May.
    13. Konan Chan & Mei‐Xuan Li & Chu‐Bin Lin & Yanzhi Wang, 2022. "Organization capital effect in stock returns—The role of R&D," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(7-8), pages 1237-1263, July.
    14. Sudi Sudarsanam & Ashraf A. Mahate, 2003. "Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1‐2), pages 299-342, January.
    15. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, October.
    16. Keith Lam & Frank Li, 2008. "The risk premiums of the four-factor asset pricing model in the Hong Kong stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 18(20), pages 1667-1680.
    17. John Cotter & Niall McGeever, 2018. "Are equity market anomalies disappearing? Evidence from the U.K," Working Papers 201804, Geary Institute, University College Dublin.
    18. repec:gnv:wpaper:unige:76321 is not listed on IDEAS
    19. Wallmeier, Martin & Tauscher, Kathrin, 2012. "A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model," FSES Working Papers 433, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    20. Hoechle, Daniel & Schmid, Markus & Zimmermann, Heinz, 2017. "Does Unobservable Heterogeneity Matter for Portfolio-Based Asset Pricing Tests?," Working Papers on Finance 1717, University of St. Gallen, School of Finance, revised Mar 2020.
    21. Mouselli, Sulaiman & Jaafar, Aziz & Goddard, John, 2013. "Accruals quality, stock returns and asset pricing: Evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 203-213.

    More about this item

    Keywords

    Asset pricing; Book-to-market; Fama and French model; Size;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:46:y:2014:i:3:p:281-294. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.