Fama-French Portfolios and Factors
Description: The Fama-French Three Factor Model provides a useful tool for understanding portfolio performance, measuring the impact of active management, portfolio construction and estimating future returns.
The Fama-French Portfolios are constructed from the intersections of two portfolios formed on size, as measured by market equity (ME), and three portfolios using the ratio of book equity to market equity (BE/ME) as a proxy for value. Returns from these portfolios are used to construct the Fama-French Factors, which capture a statistically significant fraction of the variation in stock returns. The Pastor-Stambaugh Liquidity series includes 'non-traded' and 'traded' liquidity factors, with the latter series derived from dividing common stocks (in the CRSP monthly stocks file data) into 10 groups based on each stock's sensitivity to the 'non-traded' liquidity innovation factor. The Sadka Liquidity measures are non-traded, market-wide, undiversifiable risk factors. Price impact is separated into permanent (variable) and transitory (fixed) price effects.
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