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A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model

Wallmeier, Martin ; Tauscher, Kathrin

(Working Papers SES ; 433)

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...