DISSECTING ANOMALIES FAMA FRENCH PDF

The addition of two more factors to the 3-factor model has drawbacks 5- factor model still ignores momentum and low volatility Addition of two quality factors premature Opinions on main implications are divided Three Robeco experts on empirical asset pricing give their views. They acknowledge the major contributions Fama and French have made to the literature in the past and so studied this new research with great interest. However the debate is set to continue — they take a critical view of this newly proposed model. Nobel laureate Eugene Fama and Kenneth French have developed a 5-factor model1 to describe stock returns by adding two new factors to their classic 3-factor model. The size effect is that stocks with a small market cap earn higher returns than stocks with a large market cap, and was found to exist in the period.

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The addition of two more factors to the 3-factor model has drawbacks 5- factor model still ignores momentum and low volatility Addition of two quality factors premature Opinions on main implications are divided Three Robeco experts on empirical asset pricing give their views.

They acknowledge the major contributions Fama and French have made to the literature in the past and so studied this new research with great interest. However the debate is set to continue — they take a critical view of this newly proposed model.

Nobel laureate Eugene Fama and Kenneth French have developed a 5-factor model1 to describe stock returns by adding two new factors to their classic 3-factor model. The size effect is that stocks with a small market cap earn higher returns than stocks with a large market cap, and was found to exist in the period.

The value effect is the superior performance of stocks with a low price to book compared with stocks with a high price to book. Fama and French have now added profitability stocks with a high operating profitability perform better and an investment factor stocks of companies with the high total asset growth have below average returns.

Both new factors are concrete examples of what are popularly known as quality factors. We asked three Robeco experts , who recently published a research article on this topic in the Journal of Portfolio Management, what they think of this new model. Stay informed on Quant investing with monthly mail updates Subscribe Adding more factors has drawbacks Van Vliet sees the addition of two more quality factors as a big change from the old model.

All these factors interact, which makes it more difficult to summarize the cross section of stock returns. I would prefer it if they showed that just a handful of factors can be used to explain the performance of the numerous factors found in the literature.

They do this in the follow up paper, but it should form the basis for their study. What they left out was a surprise Van Vliet is more surprised by the factors they did not include. An alternative approach would be to scrap the market factor altogether, but they did not choose this more radical step. Why select two instead of twenty? Why select those two particular variables? A lot of questions remain unanswered.

However, in their 5-factor model they use exactly this same asset growth variable in their investment factor. Opinions on main implications divided The three experts are divided on what the main implications of the 5-factor model will be. Blitz suggests that Fama and French may have distanced themselves from their previously steadfast belief in efficient markets, where the relation between risk and return is linear and positive.

These additional factors will give quite some food for thought the coming years. This article was initially published in October

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FamaPhD Kenneth R. French Journal of Finance Summarized by Stephen Phillip Huffman Privacy Settings Functional cookies, which are necessary for basic site functionality like keeping you logged in, are always enabled. Allow analytics tracking. Analytics help us understand how the site is used, and which pages are the most popular. Read the Privacy Policy to learn how this information is used. Save Settings View the full article PDF Abstract The authors investigate the pervasiveness of well-known return anomalies for three size categories—microcaps, small stocks, and big stocks. By using univariate sort analysis and regression analysis, they find that the anomalies associated with net stock issues, accruals, and return momentum are pervasive in all size groups.

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