The Sources of the Value Premium during the Non-Financial Crisis and Financial Crisis Periods

Abstract

The value premium (VP), proxied by HML (High B/M minus Low B/M), is broken into the VP on small stocks (HMLS) and on big stocks (HMLB) in this study, therefore, CAPM is first used to examine whether Jensen Alpha (𝞪) of HML, HMLS and HMLB portfolios exists during the non-financial crisis and financial crisis periods for the Taiwan stock market. Next, this study examines which source or component of the VP provides better explanatory power in the Fama-French three-factor model (FF Model) for 17 portfolios (all sample firms and 16 industry portfolios) returns during the two examination periods. The evidence of CAPM demonstrates the existence of small component of the value premium (HMLS), significant and positive Jensen Alpha, during the financial crisis period. Next, the results of 17 portfolios show that HML, HMLS and HMLB variables provide the same explanatory power in FF Model during the non-financial crisis period. However, the explanatory power of HMLB variable is better than that of HML and HMLS variables during the financial crisis period, indicating that HMLB variable can replace HML variable in FF Model during the financial crisis period.