Reference : Seeking the Best Fundamental Risk Factors: A Clinical Approach to Fama-French Portfol...
E-prints/Working papers : First made available on ORBi
Business & economic sciences : Finance
http://hdl.handle.net/2268/218067
Seeking the Best Fundamental Risk Factors: A Clinical Approach to Fama-French Portfolio Decomposition
English
Lambert, Marie mailto [Université de Liège - ULiège > HEC Liège : UER > Analyse financière et finance d'entreprise >]
Fays, Boris mailto [Université de Liège - ULiège > HEC Liège : UER > Analyse financière et finance d'entreprise >]
Hübner, Georges mailto [Université de Liège - ULiège > HEC Liège : UER > Gestion financière >]
Dec-2017
No
[en] This paper performs a thorough analysis of competing construction methods for the design of size (SMB) and value (HML) spread portfolios à la Fama-French. This quasi-clinical investigation of methodological choices uncovers substantial differences in the capacity of estimated premiums to translate stock characteristics into returns. A sequential sort of stocks into long and short portfolios conditioned on control variables (“pre-conditioning”) produces factors that best reflect the corresponding fundamental attributes. Our results are stronger when using the whole firm sample to define breakpoints and a triple sort, which ensures the same diversification (in terms of number of firms) across the characteristic-sorted portfolios forming the long and short legs of the factor. Our results are robust to the inclusion of the momentum dimension in the multiple sorting. The best method produces a volatile and insignificant size premium, but a high and stable value premium.
http://hdl.handle.net/2268/218067

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