Conditional Multifactor Explanations of Asset Pricing Anomalies
The traditional Fama/French model is rejected on the GRS test considering portfolios formed on size even though size is a characteristic directly covered in the model. In this paper I propose a conditional formulation of the original model that is not rejected on the GRS test for size portfolios. The conditional model builds on the recent finding that the size premium is restricted to high book to market years. More generally, in terms of the GRS test the conditional model tends to outperform the original (unconditional) Fama/French formulation for portfolios sorted on book to market, size, earnings/price, cash flow/price, dividend/price, long and short term reversion, momentum, industry classification, and the 25 double sorted Fama/French portfolios.