Noël Amenc, Robert Faff, Lionel Martellini: There is an urgent need for improved measurement and benchmarking of size and booktomarket (style) performance.
EDHEC Graduate School of Business and Misys Asset Management Systems
Department of Accounting and Finance, Monash University
EDHEC Graduate School of Business
Given the proliferation of choice, a potentially serious problem is that existing style indexes can provide a somewhat confusing picture of the return on these factors. In this paper, we present detailed evidence of strong heterogeneity in the information conveyed by competing indexes. We also report disturbing evidence that this heterogeneity poses serious problems, not only for modern portfolio analysis, but also for empirical tests of asset pricing theory. This is somewhat reminiscent of Roll’s (1977) critique of CAPM: if the “true” book-to- market and size factors are not observable, and if there is very little robustness with respect to the choice of the proxy used in empirical tests, then the relevance of these factors in asset pricing theory may never be empirically testable. As an attempt to address some of these problems, in exploratory analysis we suggest various methodologies designed to help extract a “pure style index” from competing index returns.
|Research Cluster :||Finance|