Why Fama–French Uses NYSE Stocks to Set Portfolio Breakpoints
Summary
Fama–French portfolio breakpoints are thresholds calculated from NYSE-listed stocks and then applied to stocks listed on the NYSE, AMEX, and NASDAQ. The explanation links this choice to differences in market capitalization across exchanges and the addition of AMEX and NASDAQ securities to the CRSP sample over time.
If all exchanges determined the thresholds, the growing number of smaller AMEX and NASDAQ listings could make market-equity portfolios largely separate stocks by exchange rather than create balanced size groups. Using NYSE stocks to set the thresholds ensures that the NYSE component is represented across the portfolios, reducing that listing-related distortion. The document cites historical changes in the CRSP sample and Fama–French research to support this rationale. It explains the construction choice, but does not evaluate alternative breakpoint methods or their performance in later research.
Key ideas
- NYSE breakpoints are calculated using NYSE stocks alone.
- Stocks from NYSE, AMEX, and NASDAQ are then sorted using those thresholds.
- Using all exchanges to set market-equity breakpoints could cause portfolios to reflect exchange listing rather than size.
- The method aims to distribute NYSE stocks across portfolios.
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Full text
# What is NYSE breakpoint as used by Fama French? # What is NYSE breakpoint as used by Fama French? I googled the term, the closest I could find was "breakpoint", which does not fit the context. ## Answer by skoestlmeier (score 6, accepted) https://quant.stackexchange.com/a/49662 ### NYSE is the abbreviation for New York Stock Exchange Most financial researchers like Fama/French use the CRSP database for US financial data. It is maintained by the University of Chicago's Booth School of Business and provides data for NYSE-, AMEX-, and NASDAQ-listed securities from December 31, 1925 through the present. ### NYSE-Breakpoints The breakpoints in Fama/French (1993) are calculated using only NYSE-stocks (i.e. stocks listed at the New York Stock Exchange). Then, all stocks (NYSE, AMEX and NASDAQ listed stocks) are sorted into portfolios based on these breakpoints. The addition of AMEX stocks into the mainly used CRSP database in July 1962 increased the CPI-adjusted value of all stocks (prior to 1962 these were just NYSE-listed stocks) in the CRSP database just about 300 billion USD (i.e. about 14%). This indicates, that these stocks tend to have very small market capitalization. Similarly, NASDAQ stocks entering in Dec. 1972 counted for only 12.6% of the total CPI-adjusted market capitalization of the entire CRSP database stocks. ### Why did Fama/French (1993) only consider NYSE-stocks for calculating breakpoints? If the breakpoints were based on considering all stocks in the CRSP sample, the result would be that the breakpoints effectively serve to separate the NYSE stocks from AMEX- and NASDAQ-stocks. Though their approach guarantees, that an equal amount of NYSE stocks is provided in each portfolio. As a result, they avoid the bias of separating their portfolios nearly perfectly on the stock exchange listing, which is also described on p.430 in their Fama/French (1992) paper: > If we used stocks from all three exchanges to determine the ME breakpoints, most portfolios would include only small stocks after 1973, when NASDAQ stocks are added to the sample. #### References Fama/French (1992), The Cross-Section of stock returns, The Journal of Finance 47(2) Fama/French (1993), Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33(1)
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