Growth Opportunities, Assets in Place, Stocks Migration and CAPM: A Rational Foundation for the Fama-French and Momentum Factors

35 Pages Posted: 6 Dec 2011 Last revised: 29 Jul 2013

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

Can the Fama-French (1993) factors and Carhart’s (1997) momentum factor be derived from CAPM? Surprisingly, the answer is YES, once a basic form of market friction is accounted for. Investors cannot trade growth opportunities (GOs) separately from net assets in place (NAIPs). Investors do not fulfill their potential demands for GOs and NAIPs “shares” when buying value and growth stocks. The migration of stocks across cap and style categories (Fama and French, 2007) plays a key role in the analysis. The momentum factor is related to the temporary mean-aversion of price-to-book ratios for stocks that transit through the neutral category.

Keywords: market incompleteness, CAPM, Fama and French, three factor model, HML, SML, SMB, momentum, Carhart, migration, size premium, value premium, growth opportunities, net assets in place, book value, equity, pent-up demand, carve-outs, asset impairments

JEL Classification: G12

Suggested Citation

Faugère, Christophe, Growth Opportunities, Assets in Place, Stocks Migration and CAPM: A Rational Foundation for the Fama-French and Momentum Factors (August 2013). Available at SSRN: https://ssrn.com/abstract=1968801 or http://dx.doi.org/10.2139/ssrn.1968801

Christophe Faugère (Contact Author)

Kedge Business School Bordeaux ( email )

680 Cours de la Liberation
Bordeaux, Aquitaine 33405
France

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