What Drives the Size and Value Factors?
35 Pages Posted: 2 Feb 2017 Last revised: 23 Jul 2020
Date Written: July 1, 2019
I show that over 40% of movements in the Fama-French size and value factors are temporary price pressures. Since 1980, investors frequently made large capital reallocations across mutual funds of different size and value styles, generating large factor-level price pressures that completely reverse subsequently. Further corroborating the price pressure interpretation, flow-induced price movements happen exclusively in intraday (open to close) returns, but not in overnight (close to open) returns, consistent with the fact that mutual funds tend to trade during market hours. Overall, these findings imply that a sizeable fraction of factor movements do not represent fundamental risk.
Keywords: Fama-French Three Factor Model, Price Pressures, Style Investing
JEL Classification: G10, G12, G23, G40
Suggested Citation: Suggested Citation