What Drives the Size and Value Factors?
38 Pages Posted: 2 Feb 2017 Last revised: 29 Jun 2021
Date Written: June 28, 2021
Since Fama and French (1992) and Lakonishok, Shleifer, and Vishny (1994), researchers have incessantly debated whether size and value factors capture economic risk. I find that a large fraction of price fluctuations in the Fama-French size and value factors are non-fundamental price pressures driven by correlated fund flows. These large demand-driven price movements revert over time, explaining approximately 30% of overall factor price fluctuations. Further corroborating the price pressure interpretation, these demand-driven price effects happen exclusively in periods when mutual funds place trades. Overall, my findings imply that a sizeable fraction of factor movements do not represent fundamental risk.
Keywords: Asset Pricing Factors, Excess Volatility, Demand Effects, Price Pressures
JEL Classification: G10, G12, G23, G40
Suggested Citation: Suggested Citation