Do Multiple Factors Help or Hurt?
23 Pages Posted: 25 Aug 2004
Date Written: August 2004
This study compares the single-factor CAPM with the Fama and French three-factor model and the Carhart four-factor model using a broad cross-section and long time-series of US stock portfolios and controlling for market capitalization. Confirming known results, multiple factors help for value and momentum portfolios in the post-1963 period, most notably for the small cap market segment. However, multiple factors generally do not help or even hurt (1) in the pre-1963 period, (2) for size, beta, reversal, and industry portfolios and (3) within the large cap market segment. These empirical findings support the data snooping hypothesis or other non-risk based explanations such as high transaction costs and low market liquidity for small caps.
Keywords: Fama-French factors, Carhart factor, SMB, HML, WML, efficiency tests
JEL Classification: G10, G12
Suggested Citation: Suggested Citation