What Drives the Size and Value Factors?

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Jiacui Li

The Review of Asset Pricing Studies, 2022, vol. 12, issue 4, 845-885

Abstract: I find that approximately 30% of price fluctuations in the Fama-French size and value factors are nonfundamental price pressures driven by correlated fund flows, which generate price movements that revert over time. Is this really demand-based price pressure? I show that the price effects happen exclusively in periods when mutual funds place trades, a fact that is difficult to explain using traditional mechanisms such as unobserved investor preference changes. The estimated price elasticity is also consistent with other studies. Overall, my findings show that a sizable fraction of size and value factor movements do not represent economic risk. (JEL G10, G12, G23, G40)

Date: 2022
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