The Size and Book-to-Market Effects Revisited
University of Liege - HEC Management School; Maastricht University - School of Business and Economics; Free University of Brussels, Belgium - Solvay Brussels School of Economics and Management
HEC Management School - University of Liège; Maastricht University - Department of Finance; Gambit Financial Solutions
April 26, 2012
Fama and French (F&F) factors do not represent pure estimates of the size and book-to-market effects. We argue that the independent sorting procedure underlying the formation of the F&F mimicking portfolios distorts the rankings of US stocks along the size and book-to-market dimensions, causing spurious correlations between the premiums. Replacing independent rankings by conditional ones improves the properties of the individual risk premiums. As a major improvement, the technique delivers less specification errors when pricing passive investment indices.
Number of Pages in PDF File: 70
Keywords: Fama-French, Carhart, Size, Book-to-market, Momentum, Mimicking Portfolios
JEL Classification: G11, G12
Date posted: August 27, 2011 ; Last revised: November 23, 2012
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