SIZE MATTERS, BOOK-TO-MARKET DOES NOT! THE FAMA-FRENCH CAPM REVISITED

The Fama and French factors do not reliably estimate the size and book-to-market effects. Our aim is to demonstrate that these factors have been under- and overestimated, respectively, in the US market. We replaced Fama and French’s independent rankings with the conditional ones introduced by Lambert and Hubner (2013), withsome additional modifications designed to improve the sorting procedure. We have been able to highlight a much stronger size effect than has conventionally been documented. As a significant related outcome, the alternative risk factors have been found to deliver less specification errors when used to price passive investment indices.

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