30622
20131209145632.0
oai:doc.rero.ch:20121115172505-OA
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cdu34
eng
33
Wallmeier, Martin
eng
A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model
2012-11-15
33
Working Papers SES
433
eng
In the three-factor model of Fama and French (1993), portfolio returns are explained by the factors Small Minus Big (SMB) and High Minus Low (HML) which capture returns related to firm capitalization (size) and the book-to-market ratio (B/M). In the standard approach of the model, both the test portfolios and the factor portfolios SMB and HML are formed on the basis of size and B/M. This gives rise to a potential overlapping bias in the time-series regressions. Based on a resampling method and the split sample approach already proposed by Fama and French (1993), we provide an in-depth analysis of the effect of overlapping for a broad sample of European stocks. We find that the overlapping bias is non-negligible, contrary to what seems to be general opinion. As a consequence, the standard approach of applying the three-factor model tends to overestimate the ability of the model to explain the cross-section of stock returns.
eng
Asset pricing ; three-factor model ; portfolio overlapping ; size effect ; value premium
Tauscher, Kathrin
http://www.unifr.ch/ses/wp
Faculté SES
WP_SES_433.pdf
application/pdf
338962
http://doc.rero.ch/record/30622/files/WP_SES_433.pdf
order:1
Document
Faculté des sciences économiques et sociales
Décanat, Av. de l'Europe 20, 1700 Fribourg
Université de Fribourg
Fribourg
doc.support@rero.ch
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UNIFR
Working Papers SES
20121115172505-OA