Estimating the Fama and French Factors in the UK - An Empirical Review

The Fama and French (1993) three factor model has been used in controlling for risk in theestimation of abnormal returns stemming from various events (e.g., IPOs, takeovers, etc.),portfolio strategies (e.g., those exploiting accounting numbers such as post-earningsannouncement drift or total accruals), and the performance of mutual funds/unit trusts. Theseuses can be found in the literature for the UK, the USA, and elsewhere. In the USA, theestimation of the factors has become increasingly standardised – they are available fromFrench’s website (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french) and researcherscan freely download them. In the UK, however, the situation is different and different (setsof) researchers use different ways of calculating, in particular, SMB (reflecting the size effect)and HML (reflecting the book-to-market effect). This plethora of methods makes it difficultto compare across papers using different methods – further, it is confusing to new researcherstrying to understand how best to control for risk when using UK data....