Fundamental Indexation and the Fama-French Three Factor Model: Risk Assimilation or Stock Mispricing?
Volume 13, Number 4, Fourth Quarter 2015
Xiaofeng Shi, Mike Dempsey and Laurence Irlicht
We confirm the outperformance of fundamental indexation (FI) portfolio returns as due to an exploitation of stock mispricing, while, simultaneously, largely explained in terms of the Fama–French three-factor (FF-3F) model. This leads us to conclude that rather than FI representing a repackaging of the book to market and small firm size effects as encountered in the FF-3F model, the impact of these factors in the FF-3F model is explained by their ability to differentiate on aggregate between over- and under-priced stocks.