Essays in Empirical Asset Pricing

Abstract

My dissertation includes three chapters on the value premium. In the first chapter, I study whether seemingly innocuous decisions in the construction of the original HML portfolio (Fama and French, 1993) affect our inference on the value premium. I find that the value premium is dramatically smaller than we thought. In sample, the average estimate of the value premium is 0.09% per month smaller than the original estimate of the value premium. Out of sample, however, the difference is statistically insignificant. The results suggest that the original value premium estimate is upward biased because of a chance result in the original research decisions. In the second chapter, I propose an estimate for intangible assets and growth opportunities and examine if this estimate improves book-to-market equity as a measure of value. I find that portfolios sorted on book equity plus the estimate to market equity have lower returns than portfolios sorted on book-to-market equity. The results suggest that intangible assets and growth opportunities diminish book-to-market equity as a measure of value because investors value intangible assets and growth opportunities in an overly optimistic way. In my third chapter, I simultaneously study nine explanations of the value effect to better understand what the dominant value explanation is. I find that duration accounts for most of the value effect and that the eight other explanations account for a negligible part of it. The results suggest that duration is the dominant explanation of the value effect.