Size and Value Matter, But Not the Way You Thought
68 Pages Posted: 30 May 2016 Last revised: 2 Feb 2017
Date Written: November 11, 2016
We propose a fundamental methodological change to Fama and French (1993) factor construction procedure. Consistent with Lambert and Hübner (2013) sequential sorting procedure to classify stocks, our methodology controls ex ante for pricing errors produced by multifactor models. Our size and value factors deliver less specification errors when used to price passive portfolios including the new portfolio sorts of Fama and French (2015a, b). The sequential model delivers excellent pricing performance for corner portfolios such as low size and high B/M stocks. Furthermore, this alternative framework generates much stronger “turn-of-the-year” size and “through-the-year” book-to-market effects than conventionally documented.
Keywords: size, value, small angels, Fama and French, sequential sorting, January effects
JEL Classification: G11, G12
Suggested Citation: Suggested Citation