Resurrecting the Value Factor from its Redundancy
Type
working paper
Date Issued
2023-12-28
Author(s)
Abstract
The value factor lacks incremental pricing power in the Fama-French five-factor model, being subsumed by the investment factor. The factors' relationship arises because book-to-market and investment both capture information about expected returns and cash flows. Using only stocks whose book-to-market and investment primarily reflect expected return information to construct the factors increases their means and Sharpe ratios by more than 50%. Importantly, the adjusted factors capture not only more but also complementary pricing information and improve the five-factor model's pricing power. Thus, a value factor built from stocks for which book-to-market is a good expected return indicator is not redundant.
Language
English
Keywords
Fama-French five-factor model
value factor
investment factor
bookto-market
investment JEL Classification: G12
HSG Classification
contribution to scientific community
HSG Profile Area
None
Subject(s)
Division(s)
Contact Email Address
tobias.hemauer@unisg.ch
Eprints ID
264631
File(s)![Thumbnail Image]()
Name
Paper_IApx.pdf
Size
954.24 KB
Format
Adobe PDF
Checksum (MD5)
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