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Why Fama-French Uses NYSE Breakpoints for Portfolio Factors

Article Quant Q&A · Author: Andy
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Summary

The document explains why Fama-French factor portfolios use NYSE stocks to set market-value breakpoints instead of sorting all stocks across exchanges together. The historical CRSP coverage of NYSE stocks began earlier than its coverage of Amex and Nasdaq. Using the full database would therefore introduce a structural change when the other exchanges enter the sample: many smaller firms would appear at once, shifting the size distribution and potentially making historical portfolio definitions inconsistent.

A second rationale is that microcaps represent a large share of listed firms by count while accounting for a much smaller share of market value. Their varied characteristics could dominate breakpoints if every stock were included. NYSE-based thresholds limit that influence and support more stable sorts across time. The explanation is qualitative and does not compare alternative breakpoint rules empirically; the discussion focuses on market-cap sorting in the context of factor construction.

Key ideas

  • NYSE data provide a longer historical basis for consistent portfolio breakpoints.
  • Adding later-coverage exchanges to the full sample can cause an artificial shift toward smaller stocks.
  • Microcaps are numerous relative to their share of aggregate market value and can heavily influence sorts.
  • NYSE-based thresholds reduce the influence of microcaps on factor portfolio assignments.

Tags

EquitiesFactor investingPortfolio constructionUS markets
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# Why do Fama French use NYSE breakpoints in the factors creation


# Why do Fama French use NYSE breakpoints in the factors creation












Why do Fama French use NYSE breakpoints in the factors creation and not just aggregate all the stocks on the three exchanges and use that to create the portfolios used to create factors.

## Answer by Alex C (score 4)

https://quant.stackexchange.com/a/38052

The CRSP tape covers NYSE stocks since 1926. The Amex and Nssdaq stock data kicks in later (1960s). Therefore if you are going to use one consistent method to break stocks into market value groups it needs to be based on NYSE criteria. If you base it on all CRSP stocks there will be a break or inconsistency in the year when non-NYSE stocks are added and the number of CRSP stocks increases greatly and most of the new stocks coming in are fairly small cap. (If you plot the median (or other quantile) of all CRSP stocks MV there is a big drop at that time. Nothing has changed in the US economy, it is just that a lot of small cap and microcap stocks are joining the CRSP database that were previously not included).

## Answer by jd8 (score 2)

https://quant.stackexchange.com/a/38049

They mention in one of their papers that “microcaps”, those stocks that make up 60% of the investable universe by number only make up something like 3% of total market value. The variability in characteristics of these stocks would mean they determine most of the portfolio breakpoints when you perform sorts. The use of NYSE breakpoints prevents this.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.