On the information content of the fama and French factors in the UK Manchester Business School Working Paper, No. 559 Provided in Cooperation with: Manchester Business School, The University of Manchester Suggested Citation: Mouselli, Sulaiman; Michou, Maria; Stark, Andrew (2008) : On the information content of the fama and French factors in the UK, Manchester Business School Working Paper, No. 559, The University of Manchester, Manchester Business School, Manchester This Version is available

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... : http://hdl.handle.net/10419/50698 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The working papers are produced by The University of Manchester -Manchester Business School and are to be circulated for discussion purposes only. Their contents should be considered to be preliminary. The papers are expected to be published in due course, in a revised form and should not be quoted without the authors' permission. Abstract This study explores the information content of HML and SMB by linking the Fama-French factors to shocks in the state variables which predict future investment opportunities. It shows that the HML factor contains information about shocks to default spread. Moreover, the Fama-French model explains the cross-section of average returns on portfolios sorted on size and book-to-market ratio better than both a model that includes shocks to the state variables and a model that includes news related to future industrial production growth in addition to the market factor. Furthermore, when loadings on HML and SMB are present in the model, loadings on shocks to default spread lose its explanatory power for the cross-section of returns. The results provide economic interpretation for the empirical success of HML factor but different from the US evidence that shocks to state variables subsume Fama-French factors. Abstract This study explores the information content of HML and SMB by linking the Fama-French factors to shocks in the state variables which predict future investment opportunities. It shows that the HML factor contains information about shocks to default spread. Moreover, the Fama-French model explains the cross-section of average returns on portfolios sorted on size and book-to-market ratio better than both a model that includes shocks to the state variables and a model that includes news related to future industrial production growth in addition to the market factor. Furthermore, when loadings on HML and SMB are present in the model, loadings on shocks to default spread lose its explanatory power for the cross-section of returns. The results provide economic interpretation for the empirical success of HML factor but different from the US evidence that shocks to state variables subsume Fama-French factors.