Abstract

Preliminary version Abstract. In this study, we provide the first empirical analysis of Ferguson and Shockley (2003) theoretical framework on the French stock market for the period from July 1984 to June 2001. The objective is to study the market, SMB, HML and the leverage factors in explaining cross-sectional returns. Indeed, Ferguson and Shockley (2003) argue that the CAPM doesn’t work because, in empirical studies, we use an equity-only proxy for the true market portfolio and we ignore the debt claims. Book to market and size, variables which are correlated with leverage, will appear to explain returns. Our main result is that the leverage factor doesn’t subsume the SMB and HML factors. In cross-sectional regressions, only the size premium is statistically significant and help explaining returns. In time-series regressions, the three factors (SMB, HML and leverage), with the market portfolio, do a good job. This result suggests that the leverage portfolio has an additional improvement of the model. Nevertheless, it doesn’t subsume the SMB and HML factors in the French case.