What Does ßSMB>0 Really Mean?

Abstract

A positive SMB coefficient in a Fama-French regression is often interpreted as signaling a portfolio weighted toward small-cap stocks. We present a portfolio with known very large size, which has a positive SMB coefficient for all periods. We emphasize that this is associated with the co-existence of both “M” ― the market ― and “SMB” ― the mimicking portfolio for size ― in the Fama-French three-factor model. We explain why the model can attribute small size to large-cap stocks and portfolios. The results highlight how coefficients should be interpreted when a self-financing portfolio is used for portfolio attribution.

JEL Classification: G10, G11