What Drives the Size and Value Factors?

38 Pages Posted: 2 Feb 2017 Last revised: 29 Jun 2021

See all articles by Jiacui Li

Jiacui Li

David Eccles School of Business, University of Utah

Date Written: June 28, 2021

Abstract

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

Li, Jiacui, What Drives the Size and Value Factors? (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=2909960 or http://dx.doi.org/10.2139/ssrn.2909960

Jiacui Li (Contact Author)

David Eccles School of Business, University of Utah ( email )

8123 SFEBB, 1655 Campus Center Dr
Salt Lake City, UT 84112
United States

HOME PAGE: http://https://www.jiacui-li.com/

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