Size and Value Matter But Not the Way You Thought

Fama and French risk premiums do not reliably estimate the magnitude of the size or book-to-market effects, inducing many researchers to inflate the number of factors. We object that controlling ex ante for noise in the estimation procedure enables to keep a parsimonious set of factors. We replace Fama and French’s independent rankings with the conditional ones introduced by Lambert and Hübner (2013). This alternative framework generates much stronger “turn-of-the-year” size and “through-the-year” book-to-market effects than conventionally documented. Furthermore, the factors deliver less specification errors when used to price portfolios, especially regarding the “small angels” (low size – high BTM stocks).