| Abstract: | This paper shows that some of the most prominent risk-basedtheories offered as explanation for the value premium are atodds with data. The models proposed by Fama and French (1993),Lettau and Ludvingson (2001), Campbell and Vuolteenaho (2004),and Yogo (2006) can capture the cross-section of returns ofportfolios sorted on book-to-market ratio and size, but notof portfolios sorted on book-to-market ratio and institutionalownership. These models generate economically large pricingerrors in all the institutional ownership quintiles and eachstatistical test indicates that these pricing errors are significant.More generally, these results show that a minor alteration ofthe test assets can lead to a dramatically different answerregarding the validity of a given asset pricing model. |
