Daily Academic Alpha: Fresh Evidence on the Fama French 5-Factor Model

Daily Academic Alpha: Fresh Evidence on the Fama French 5-Factor Model

July 15, 2015 Yahoo Tickers, $mtum, $vlue, $iwd
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(Last Updated On: January 18, 2017)

The past few weeks we’ve highlighted a set of research papers that go back and forth on the validity of the Fama and French “5-factor model.”

A sampling of the research:

We summarize the debate/controversy in a couple of recent posts:

Now we have a new paper from Back, Kapadia, and Ostdiek that investigates the merits of both the FF 5-Factor and the KXZ 4-Factor.

Alphas of Betas: Testing Characteristics-Based Factor Models

We test the recent Fama-French five-factor model and Hou-Xue-Zhang four-factor model using test assets from Fama-MacBeth regressions, which are bets on particular characteristics or covariances that are neutral with respect to others. Monte Carlo evidence shows that the tests are unbiased, despite errors in variables. Test assets that are bets on characteristics (covariances) have positive (negative) alphas. In particular, neither model can explain returns related to investment rates, the Fama-French model cannot explain momentum, and the Hou-Xue-Zhang model cannot explain value. The rejections are economically significant.

Sure sounds like nobody can explain active  value investing and momentum investing excess returns…


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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.