However, the 25 portfolios sorted on book to market and size are highly diversified and should contain no significant firm-specific or industry-specific influences and so, can be compared to the industry portfolio results to ascertain whether industry-specific information appears to make a difference.
Third, the Fama and French factors might not mimic book to market and size as well as previous return.
The size and book to market factors will add only incrementally to the explanatory power of a model which included the market factor.
t] is not significant in the general model implies that previous return of the industry contains more or better information than the common factor designed to mimic the book to market value ratio.
We have demonstrated that the definition of return implicitly includes the book to market and size factors and that this fact helps to explain why the Fama and French (1993) factors "work" in their three factor model.
This indicates that either there is an important omitted variable (such as dividend payout) or that the Fama and French factors do not measure or mimic size and book to market as well as previous return and [SMB.
In this Appendix, we show first how book to market [BV.
t] depends only on the distribution of book to market values of all securities for that time.
9) "high minus low" book value to market factor is calculated for time t+1 essentially as the simple average of the returns for time t+1 for the highest ranked (based on each June's book to market ratio) one third of firms less the average of the returns for the lowest ranked one third of firms.
In (A6), the average of the time t+1 returns of the top one third of securities based on previous month book to market are subtracted from the bottom ranked one third.
t+1] is proportional to the expected difference between successively ranked book to market values [[delta].