Size Matters, Book Value Does Not! The Fama-French Empirical CAPM Revisited
59 Pages Posted: 19 Nov 2015
Date Written: May 1, 2014
The Fama and French (F&F) factors do not reliably estimate the size and book-to-market effects. Our paper shows that the former has been underestimated in the US market while the latter overestimated. We do so by replacing F&F's independent rankings by the conditional ones introduced by Lambert and Hubner (2013), over which we improve the sorting procedure. This new specification better reflects the properties of the individual risk premiums. We emphasize a much stronger size effect than conventionally documented. As a major related outcome, the alternative risk factors deliver less specification errors when used to price passive investment indices.
Keywords: Asset Pricing, Size, Book-to-market, momentum, mimicking portfolios
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