A sector strategy from the Fama and French model

Abstract

In this article, we test the degree of possible interest there may be in developing an investment strategy based on the three-factor Fama and French model (1992). To this end, we construct a sectorial strategy, taking as a market risk factor the sectorial index to which the securities belong. From our results, we conclude that the aforementioned strategy is of limited use, given that no extraordinary consistent yields are obtained. From this, we conclude that the hypothesis of the efficient market can be accepted.

Keywords:

• investment strategies
• Fama and French model
• sectors
• market efficiency

JEL Classification:

• G11
• G12
• G14

Notes

¹ The sectors are described in the Appendix. The financial sector is excluded, following Fama and French (1992).

² It is assumed, therefore, that some survival bias exists.

³ Thus, liquidity problems derivative of the fact that certain securities in certain months have days when they are not traded is limited.

Additional information

Funding

The authors wish to state that the financing of this research was supported by the Government of Aragón and by the EUROPEAN SOCIAL FUND.