Choosing Factors

54 Pages Posted: 2 Oct 2015 Last revised: 28 Mar 2017

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2017

Abstract

Our goal is to develop insights about the max squared Sharpe ratio for model factors as a metric for ranking asset-pricing models. We consider nested and non-nested models. The nested models are the CAPM, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (i) cash profitability versus operating profitability as the variable used to construct profitability factors, (ii) long-short spread factors versus excess return factors, and (iii) factors that use small or big stocks versus factors that use both.

Keywords: Five-factor model

JEL Classification: G12

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Choosing Factors (March 1, 2017). Fama-Miller Working Paper , Tuck School of Business Working Paper No. 2668236, Chicago Booth Research Paper No. 16-17, Available at SSRN: https://ssrn.com/abstract=2668236 or http://dx.doi.org/10.2139/ssrn.2668236

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

Kenneth R. French

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
9,532
Abstract Views
30,794
Rank
839
PlumX Metrics