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Media type:
E-Article
Title:
Do the Fama–French Factors Proxy for Innovations in Predictive Variables?
Contributor:
PETKOVA, RALITSA
imprint:
Wiley, 2006
Published in:The Journal of Finance
Language:
English
DOI:
10.1111/j.1540-6261.2006.00849.x
ISSN:
0022-1082;
1540-6261
Origination:
Footnote:
Description:
<jats:title>ABSTRACT</jats:title><jats:p>The Fama–French factors HML and SMB are correlated with innovations in variables that describe investment opportunities. A model that includes shocks to the aggregate dividend yield and term spread, default spread, and one‐month Treasury‐bill yield explains the cross section of average returns better than the Fama–French model. When loadings on the innovations in the predictive variables are present in the model, loadings on HML and SMB lose their explanatory power for the cross section of returns. The results are consistent with an ICAPM explanation for the empirical success of the Fama–French portfolios.</jats:p>