Fama–French Three-Factor Returns and Their Use as Regression Inputs
Summary
The document explains the return series used in the Fama–French three-factor model: the market excess return, SMB, and HML. It describes the market factor as the market portfolio’s return above the risk-free rate, SMB as the return of a portfolio designed to capture the size effect, and HML as the return of a portfolio designed to capture the book-to-market effect. These factor returns serve as explanatory variables for the excess return of a stock or portfolio.
The response clarifies that the factor series are fixed for a given period and factor construction, even when the dependent asset or portfolio changes. What changes across regressions is the dependent return and its estimated exposure to each factor. The document attributes the model to Fama and French in 1993, but gives no construction details, sample data, regression results, or discussion of later model variants. Its explanation is therefore introductory; applying it requires choosing a market and factor dataset appropriate to the assets and period under study.
Key ideas
- The model uses market excess return, SMB, and HML as explanatory return series.
- SMB represents a size-related factor portfolio return, while HML represents a book-to-market-related factor portfolio return.
- For a given period and factor definition, the factor values do not depend on which asset return is being explained.
- Changing the dependent asset or portfolio changes the estimated factor exposures, not the underlying factor series.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.