Fun Featuring Fama French

What is Fama French, and does it have anything to do with fried potatoes?  Eugene Fama and Kenneth French are Nobel prize winning economists who advanced, then disproved the Efficient Market Hypothesis (EMH).  We’re more interested in their disproof here, as obviously if the stock market were perfectly efficient, there would be no reason for a stock screener.  And yet, here we are…  They did this by slicing the market into sections, and observing that these sections had different performance, and that this performance persisted over time.  We aren’t Nobel prize winning economists, so we won’t duplicate their work here, but we will slice the market the way they did and look at how the slices did.

Getting the knife out

We use a set of prepared screens (handily enough labeled with the tag “Fama French”) to do our market vivisection.  Time to put them together.  We hit Ctrl Shift S (Add Screener) to import and we type Fama French:

At this point, we see exactly what we want:  High, Low and Medium book to market, and Large and Small Cap.  Time to import two of them, Large Cap first.  As soon as we click on Large Cap, or select it and hit return, the window vanishes, and we see a new tab large cap, which is revealed to have the following:

You can Control click to see what Market Cap Rank is all about.  But we won’t here.  It’s really simple.  Instead we’ll import  (Ctrl Shift S) again, type “Fama French” again, and select “High Book to Market”.  Now we have two tabs:

Time to press them into service!  We can simply type “large_cap and high_book_to_market” into the text box and backtest it and get our results:

We can see that the screen outperforms during good times and does poorly during the crash of 2007-2008 and more recently during 2015. We have just backtested what the French website calls “Large Value”.  “Small Growth” would be the other corner:  Low Book to Market, and Small Cap.

Now for the results

To satisfy your curiosity, I now will do that for each of the six combinations, so you can see how the results vary of these two fields, rebalanced quarterly.  These results will vary from the Fama French ones because we also (implicitly) filter out stocks that are too illiquid to invest in.  You can customize this with the universe variable (set it to what you want to include, but be careful, as it’s easy to include untradable securities)

Large Value
Large Neutral
Large Growth
Small Value
Small Neutral
Small Growth

What have we here?

Clearly the market is not (entirely) efficient.  Small growth does terribly, while small value and large neutral do well.  There are various explanations as to why this might be so, but I’ll let someone else explain why this might be so.  Instead, I’ll take up more slicing and dicing next time.