Noisy Factors

53 Pages Posted: 28 Sep 2021

See all articles by Pat Akey

Pat Akey

University of Toronto - Rotman School of Management

Adriana Robertson

University of Toronto - Faculty of Law

Mikhail Simutin

University of Toronto - Rotman School of Management

Date Written: September 24, 2021

Abstract

The Fama-French factors are ubiquitous in empirical finance, industry, and law. We find that factor returns differ substantially depending on when the data were downloaded. The effects of these retroactive changes are large. Holding the sample period constant and varying only factor vintages, we show this in three contexts. First, in cross-sectional equity pricing, unconditional alphas of a third of long-short ‘anomaly’ portfolios lose statistical significance. Second, in mutual fund analyses, we show that annual alphas of almost half of individual funds and even portfolios of funds change by more than 1%. Third, in the context of testing asset pricing models, F-statistics from GRS tests of the three-factor model on standard test portfolios vary by up to 40% due only to changes in factor vintages. Our results do not suggest that any particular factor vintage is dominant but point to a source of latent noise that is ignored in conventional tests. We provide suggestions to empiricists on dealing with the noise. Our findings have significant implications for the replicability and robustness of finance research and have a direct bearing on a variety of empirical contexts.

Keywords: Fama French factors, asset pricing, performance evaluation, equities, mutual funds, model fit

JEL Classification: G10, G12, G14, G20, G31

Suggested Citation

Akey, Pat and Robertson, Adriana and Simutin, Mikhail, Noisy Factors (September 24, 2021). Available at SSRN: https://ssrn.com/abstract=3930228 or http://dx.doi.org/10.2139/ssrn.3930228

Pat Akey

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Adriana Robertson

University of Toronto - Faculty of Law ( email )

78 Queen's Park
Toronto, Ontario M5S 2C5
Canada

HOME PAGE: http://https://www.law.utoronto.ca/faculty-staff/full-time-faculty/adriana-robertson

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

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