Quant · Core
Fama-French Three-Factor Model
The three-factor model adds size (SMB) and value (HML) to the market — a better cross-section than CAPM, still not the last word.
Definition
r − r_f = α + β_m MKT + β_s SMB + β_v HML + ε. SMB is small minus big; HML is high book-to-market minus low. Later work added profitability and investment (FF5) and others added momentum.
Why it matters
It is the default academic benchmark for equity ‘alpha.’ A lot of manager alpha is HML with fees.
Case
A small-cap value manager versus CAPM looks like a genius; versus FF3 the alpha shrinks to fees. The model named the style.
How to read it
State FF3 vs FF5 vs momentum. Then after-cost. Factors are portfolios with their own drawdowns (value 2018–20).
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Common Risk Factors in the Returns on Stocks and BondsFama, French · 1993 · Journal of Financial EconomicsSMB and HML.
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