Value Return Premium (HML)...Fama french Model...

HI…

I have some serious issue understanding this concept…Would be glad if u could just step in and help…

Value Return Premium= Return on Value -Growth Stocks…

Why would anybody short a growth stock and long on value…It makes no sense to me…

Thanks…

Because they think that the dividend return on the value stock will exceed the price return on the growth stock.

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These are risk-premia. FF model is an empirical model and they found a positive risk premium for value stocks (relative to growth stocks). While FF don’t explain it the finding theoretically, Bogle poohed poohed it as sample dependent.

I still Dont understand it…

As regards the other factor ie Small cap return Premium which states that small cap stocks are more riskier than large cap hence it should increase the required rate of return…

Hence SMB=Return of small minus Return of big…

Same Ways in Pastor 4 factor model …ie Liquidity…

More liquid the asset lower the risk and hence lower Rce…

Less liquid the asset means high risk and hence high Rce…

It would be great if u could explain the above mentioned question in this context…I cant memorise thingsss…i need to understand…

It is important to note that this is an empirical truth and not a theoretical model. Therefore, it is difficult to explain the logic of why the factors price in the direction that they price. Academics argue about what the true economic explanation is for why the factors price the way they do.

However, to answer your question:

The HML factor (the value factor) describes how value outperforms growth when controlling for the level of 1) benchmark relative systematic risk (i.e. beta) and 2) cap size (and liquidity, and momentum, etc., etc.). It’s not that value is riskier than growth but that for a given level of beta (and other possible risk measures), value outperforms growth.

This, I know, is an unsatisfying fact. But, it is a fact nonetheless. And, given the way people argue about this in academics, there really isnt a consensus, logical (theoretical) reason for this phenomenon, but there are dozens of contradictory, possible explanations.

just memorize it.

some other studies say that growth stocks outperforms value stocks, another one finds HML is fruitless and etc.

Thanks Mathman and passa for ur valuable advices…

Ther’s actually a lot of debate among academics as to whether the Value and size premiums in the FF model represent “alpha” (abnormal returns) or merly reflect some sort of unidentified risk. As for the second view, there’s at least one study (Can;t remember it at the moment) that seems to indicate that value stocks have higer covariance with the market during recessions. So that could explain their higher returns - it’s a risk premium.

But as I said, there’s still (even after all these years) a lot of discussion among pointy-headed nerds as to why the value and size premiums exist.