Carhart 1997 adds a momentum factor mom 7 p a g e

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Carhart (1997) Adds a Momentum Factor (MOM)
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7 | P a g e Authors used a reference portfolio, weighted 80% toward big cap stocks and 20% towards small cap. Found that portfolio had a positive SMB coefficient. According to Chen and Basset (2014) the contradiction occurs for two reasons, namely: “The first is that big firms account for most of the market value in the stock market. The second is related to the self-financing SMB portfolio that is included in the model”. Authors used a reference portfolio, weighted 80% toward big cap stocks and 20% towards small cap. Found that portfolio had a positive SMB coefficient. Help us better understand portfolio managers decisions in security selection (large cap stocks vs small cap stocks). Also why some portfolio managers do not allocate the whole portfolio toward small cap stocks to achieve a positive SMB coefficient. RESULTS Three factor model Even heavily weighted to large cap stocks the portfolio (80%) still has a SMB coefficient of positive 0.39. General perception that a heavily weight large cap portfolio should have a negative SMB coefficient. Three factor regression SMB coefficient is positive 0.13. As the weights in large cap stocks increases the SMB coefficient decreases but is positive for every weights combination except for a portfolio with 100% weighting in large cap stocks. The same results can be observed for the bivariate (two factor) model.
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