Choosing factors / by Eugene F. Fama, & Kenneth R. French Eugene F. Fama, Kenneth R. French
Material type:
TextSeries: Journal of Financial Economics ; 128 (2)Publication details: Amsterdam Elsevier May 2018Description: Pages 234-252ISSN: - 0304-405X
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Abstract
Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (1) cash profitability versus operating profitability as the variable used to construct profitability factors, (2) long-short spread factors versus excess return factors, and (3) factors that use small or big stocks versus factors that use both.
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