Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics?


  • Kent Daniel,

  • Sheridan Titman,

  • K.C. John Wei

    Search for more papers by this author
    • Daniel is at the Kellogg Graduate School of Management, Northwestern University and NBER. Titman is at the Department of Finance, University of Texas at Austin. Wei is at the Department of Finance, Hong Kong University of Science and Technology. The authors appreciate the helpful comments of the seminar participants at the Chinese University of Hong Kong, University of Hong Kong, Hong Kong University of Science and Technology, the APFA/ NFA annual conference in Tokyo, and the 2000 NTU International Conference on Finance in Taipei. The paper received the best paper award at the 2000 NTU International Conference on Finance. The authors also thank Kenneth French, Ravi Jagannathan, Keiichi Kubota, Takeshi Yamada, René Stulz (the editor), and two anonymous referees for insightful comments and Dr. Virginia Unkefe for editorial assistance. Wei also acknowledges the financial support from the Wei Lun Fellowship.


Japanese stock returns are even more closely related to their book-to-market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three-factor model, but fail to reject the characteristic model.