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Risk premium contributions of the Fama and French mimicking factors

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  • Bank, Matthias
  • Insam, Franz

Abstract

We take a new look on the Fama and French (1993) three-factor asset pricing model by extracting risk premium contributions for each factor based on solving a system of linear equations. The risk premium contributions become uncorrelated with the underlying factor excess returns and capture the isolated compensation of a given risk factor. We show that the risk premium contributions feature a January-seasonality, which exhibits a negative shift after the year 1993. Furthermore we find that after 1993 the risk premium contributions of the SMB and HML factor are strongly related to sentiment and predictable by dividend yield.

Suggested Citation

  • Bank, Matthias & Insam, Franz, 2019. "Risk premium contributions of the Fama and French mimicking factors," Finance Research Letters, Elsevier, vol. 29(C), pages 347-356.
    • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:347-356
    DOI: 10.1016/j.frl.2018.08.017
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    References listed on IDEAS

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    Cited by:

    1. Fernando Anuno & Mara Madaleno & Elisabete Vieira, 2023. "Using the Capital Asset Pricing Model and the Fama–French Three-Factor and Five-Factor Models to Manage Stock and Bond Portfolios: Evidence from Timor-Leste," JRFM, MDPI, vol. 16(11), pages 1-22, November.
    2. Son, Bumho & Lee, Jaewook, 2022. "Graph-based multi-factor asset pricing model," Finance Research Letters, Elsevier, vol. 44(C).

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    More about this item

    Keywords

    Asset pricing; Fama–French model; Risk premium contributions; Decomposition; Predictability; January effect;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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