The Book-to-Market and Size Effects in a General Asset Pricing Model: Evidence from Seven National Markets

Abstract

The positive relation of returns with Book-to-Market ratio (BE/ME) and their negative relation withMarket Value (MVE) remains strong under a general stochastic discount function (SDF) that does not depend on a specific asset pricing model and avoids potentially serious simultaneity biases inherent in the Fama and French three-factor model. However, we find that SDFs that include the equivalent of the HML portfolio do not span all asset sub-spaces, even with additional conditioning information. Finally, macro and financial variables we introduce to the pricing functions do not offer an alternative explanation of the BE/ME effect.