Re-Examination of Fama-French Factor Investing with Causal Inference Method

16 Pages Posted: 23 Jan 2024

See all articles by Lingyi Gu

Lingyi Gu

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students

Ellen Zhang

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students

Andrew Heinz

Cornell University - Operations Research and Industrial Engineering

Jingxuan Liu

Cornell University - Operations Research and Industrial Engineering

Tianyue Yao

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students

Mohamed AlRemeithi

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students

Zelei Luo

Cornell University - Operations Research and Industrial Engineering

Date Written: December 27, 2023

Abstract

This study constructs a causal graph to analyze the relationship between Fama and French's (FF) Five Factors and stock returns, using causal discovery algorithms. Within the context of causal inference, a revised specification of the linear model is developed. The findings reveal that only HML (High Minus Low) and CMA (Conservative Minus Aggressive) factors validly serve as regressors for stock returns. These results call into question the validity of the FF model's current specifications.

Keywords: causal discovery, causal inference, factor investing

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

Gu, Lingyi and Zhang, Hanyu and Heinz, Andrew and Liu, Jingxuan and Yao, Tianyue and AlRemeithi, Mohamed and Luo, Zelei, Re-Examination of Fama-French Factor Investing with Causal Inference Method (December 27, 2023). Available at SSRN: https://ssrn.com/abstract=4677537 or http://dx.doi.org/10.2139/ssrn.4677537

Lingyi Gu (Contact Author)

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students ( email )

United States

Hanyu Zhang

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students ( email )

United States

Andrew Heinz

Cornell University - Operations Research and Industrial Engineering ( email )

Ithaca, NY 14853
United States

Jingxuan Liu

Cornell University - Operations Research and Industrial Engineering ( email )

Ithaca, NY 14853
United States

Tianyue Yao

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students ( email )

United States

Mohamed AlRemeithi

Cornell University - Cornell University, College of Engineering, Cornell Financial Engineering Manhattan, Students ( email )

United States

Zelei Luo

Cornell University - Operations Research and Industrial Engineering ( email )

Ithaca, NY 14853
United States

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

Paper statistics

Downloads
89
Abstract Views
309
Rank
506,141
PlumX Metrics