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Creating Fama and French Factors with Style

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  • Robert W. Faff

Abstract

This paper utilizes Frank Russell style portfolios to create useful proxies for the Fama and French (1992) factors. The proxy‐mimicking portfolios are shown to represent a pervasive source of exposure across U.S. industry portfolios and to generally possess similar properties to those utilized in the finance literature. Further, a set of multivariate asset‐pricing tests of the three‐factor Fama and French asset‐pricing (FF) model based on the proxy factors fails to reject the model. However, these tests do not reveal strong evidence of significantly positive risk premiums, particularly in the case of the size and book‐to‐market factors.

Suggested Citation

  • Robert W. Faff, 2003. "Creating Fama and French Factors with Style," The Financial Review, Eastern Finance Association, vol. 38(2), pages 311-322, May.
  • Handle: RePEc:bla:finrev:v:38:y:2003:i:2:p:311-322
    DOI: 10.1111/1540-6288.00048
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    References listed on IDEAS

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    1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    2. Ferson, Wayne E. & Harvey, Campbell R., 1994. "Sources of risk and expected returns in global equity markets," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 775-803, September.
    3. Ferson, Wayne E. & Foerster, Stephen R., 1994. "Finite sample properties of the generalized method of moments in tests of conditional asset pricing models," Journal of Financial Economics, Elsevier, vol. 36(1), pages 29-55, August.
    4. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    5. MacKinlay, A Craig & Richardson, Matthew P, 1991. "Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, vol. 46(2), pages 511-527, June.
    6. He, Jia & Ng, Lilian K, 1994. "Economic Forces, Fundamental Variables, and Equity Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 599-609, October.
    7. Andrew Clare & Richard Priestley & Stephen Thomas, 1997. "Is Beta dead? The role of alternative estimation methods," Applied Economics Letters, Taylor & Francis Journals, vol. 4(9), pages 559-562.
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    Cited by:

    1. Robert Faff, 2014. "Alpha," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 13(4), pages 607-622, December.
    2. Juan Matallin-Saez, 2007. "Portfolio performance: factors or benchmarks?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(14), pages 1167-1178.
    3. Kai-Wei (Shaun) Siau & Stephen J. Sault & Geoffrey J. Warren & Henk Berkman, 2015. "Are imputation credits capitalised into stock prices?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(1), pages 241-277, March.
    4. Quentin Wodon, 2007. "Constructing Fama-French Factors from style indexes: Japanese evidence," Economics Bulletin, AccessEcon, vol. 7(7), pages 1-10.
    5. Ramit Mehta & Dirk Schiereck, 2012. "The Consolidation Of The Global Brewing Industry And Wealth Effects From Mergers And Acquisitions," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(3), pages 67-87.
    6. Hollander, Hilke & Prokop, Jörg, 2015. "Stock price effects of asset securitization: The case of liquidity facility providers," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 147-160.
    7. Daniel Buncic & Jon E. Eggins & Robert J. Hill & David Gallagher, 2015. "Measuring fund style, performance and activity: a new style-profiling approach," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(1), pages 29-55, March.
    8. Kenneth E Scislaw & David G McMillan, 2012. "The search for an exploitable value premium in market indexes," Journal of Asset Management, Palgrave Macmillan, vol. 13(4), pages 253-270, August.
    9. repec:ebl:ecbull:v:7:y:2007:i:7:p:1-10 is not listed on IDEAS
    10. Jon Eggins & Robert J. Hill, 2008. "Momentum and Contrarian Stock-Market Indices," Discussion Papers 2008-07, School of Economics, The University of New South Wales.
    11. Yunieta Nainggolan & Janice How & Peter Verhoeven, 2016. "Ethical Screening and Financial Performance: The Case of Islamic Equity Funds," Journal of Business Ethics, Springer, vol. 137(1), pages 83-99, August.

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