Does anyone know if the Fama-French three factor model has been re-examined empirically after 1993, when the original paper was first published?

I am asking because there seems to be considerable debate about whether the SMB and HML factors represent true risk-factors. It seems to me the best test is to see whether they still work out of sample.

  • $\begingroup$ If one of the answers was helpful it would be great if you could accept it - Thank you $\endgroup$ – vonjd May 5 '17 at 14:34

You might want to read this:

Size, Value, and Momentum in International Stock Returns by Fama and French (2011)

In the four regions (North America, Europe, Japan, and Asia Pacific) we examine, there are value premiums in average stock returns that, except for Japan, decrease with size. Except for Japan, there is return momentum everywhere, and spreads in average momentum returns also decrease from smaller to bigger stocks. We test whether empirical asset pricing models capture the value and momentum patterns in international average returns and whether asset pricing seems to be integrated across the four regions. Integrated pricing across regions does not get strong support in our tests. For three regions (North America, Europe, and Japan) local models that use local explanatory returns provide passable descriptions of local average returns for portfolios formed on size and value versus growth. Even local models are less successful in tests on portfolios formed on size and momentum.


In the following paper: "On the Cross-Section of Expected Stock Returns: Fama-French Ten Years Later" (by Chou, Chou, and Wang), the authors found, using the Fama-Mac Beth two-pass regression, that the size effect becomes insignificant during the post-1981 period, and the Book/Market effect becomes insignificant during the post-1990 period.

It is important to note that the statistical significance of the Fama-French factors is not only highly sensitive to the sample period used for testing, but also highly dependent on the test assets used as dependent variables. In both Fama-French papers (1993, 2011), the test assets were double-sorted portfolios formed on size and book/market, and/or size and momentum.

The premise of Fama-French seems reasonable: if there are priced factors that are responsible for the size and value premium, then sorting stocks into portfolios based on their size and book/market ratio are likely to result in diversified portfolios that span the factor space.

The problem is that, by grouping all of the assets with similar size or B/M together, any variation in factor loading that is independent of these two firm-characteristics is largely eliminated.

Therefore, in order to have more powerful tests, the LHS(left-hand side) portfolios should be augmented by portfolios with high correlation to the proposed factors, but with imperfect correlation with size and B/M.

  • $\begingroup$ Thanks for the paper. I'm not as concerned about the characteristic vs. factor debate; there have been tons of paper on them and there seems to be strong evidence that characteristics is as valid, if not more, an explanation. $\endgroup$ – Slow Learner Aug 11 '13 at 5:18
  • $\begingroup$ I'm more interested in whether the SMB and HML returns continue to be good. I downloaded them (as well as UMD) from Ken French's website and found those factor returns to be good, with decent sharpe ratios, after 1993. I don't know how to reconcile this with the evidence of zero premia with Fama-Macbeth regression. It seems that if SMB and HML factor portfolio returns are positive over this period, then running Fama-Macbeth should roughly "rediscover" that fact...? $\endgroup$ – Slow Learner Aug 11 '13 at 5:19
  • $\begingroup$ Well, I am not sure what you mean by "found that those factor returns to be good", from a statistical standpoint. Could you please be more precise? If by good you mean positive, unless the factor-mimicking portfolio returns are statistically significant, they won't be rediscovered by Fama-MacBeth. $\endgroup$ – Mayou Aug 12 '13 at 15:57
  • $\begingroup$ @JLi I am actually testing the Fama-French HML and SMB as well, for the period 1926-2013 using Fama-MacBeth, and I am not getting a statistically significant premia for either factors. I am testing the model using 25 5x5 sorted portfolios using size and b/m. I am also testing (in the same fashion) some in-house Valuation, Size and Momentum factors (proprietary factors), over the period 1988-2013, and I am not getting a significant premia for these either. I am wondering if using portfolios as test assets is what's throwing off this results... $\endgroup$ – Mayou Aug 14 '13 at 14:41
  • $\begingroup$ The in-house factors were also tested conditional on market regimes, and I was expecting to get a highly statistically significant Valuation premia in Bear markets, and a statistically significant Momentum premia in Bull markets.. Didn't happen either. Now, I will try testing the model using individual securities (despite the problem of time-varying regression slopes and idiosyncratic volatility). Any thoughts? $\endgroup$ – Mayou Aug 14 '13 at 14:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.