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Keywords:

  • G12;
  • G14

Abstract

I examine two anomalies where the Fama and French three-factor model fails to adequately explain monthly industry and index returns. Both anomalies are consistent with a bad model problem where the book-to-market factor introduces a negative bias in the intercepts. I propose the intangibles model as an alternative where the three-factor model is known to have difficulty. This alternative model, which replaces the book-to-market factor with zero investment portfolio returns based on prior investments in intangible assets, is well specified in random samples, has comparable power, and fully explains both anomalies.