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Fama–French Factor Timing: The Long-Only Integrated Approach


Leippold, Markus; Rüegg, Roger (2020). Fama–French Factor Timing: The Long-Only Integrated Approach. European Financial Management:Epub ahead of print.

Abstract

There is ample evidence that factor momentum exists in the standard long--short mixed approach to factor investing. However, the excess returns are put under scrutiny due to the high implementation costs. We present a novel real-life approach that relies on the long-only integrated approach to factor investing. Instead of exploiting the potential momentum in factor portfolios, our strategy builds on the momentum of the optimal factor score weights in the integrated approach, which allows us to additionally profit from the serial dependence in the factors' interaction effects. One limitation of short-term timing strategies is their high turnover. By including the information of the covariance matrix and minimizing the strategy’s risk to the market portfolio, we can substantially reduce turnover. The resulting timing alpha remains significant even after transaction costs in a robust statistical test framework across the major stock markets.

Abstract

There is ample evidence that factor momentum exists in the standard long--short mixed approach to factor investing. However, the excess returns are put under scrutiny due to the high implementation costs. We present a novel real-life approach that relies on the long-only integrated approach to factor investing. Instead of exploiting the potential momentum in factor portfolios, our strategy builds on the momentum of the optimal factor score weights in the integrated approach, which allows us to additionally profit from the serial dependence in the factors' interaction effects. One limitation of short-term timing strategies is their high turnover. By including the information of the covariance matrix and minimizing the strategy’s risk to the market portfolio, we can substantially reduce turnover. The resulting timing alpha remains significant even after transaction costs in a robust statistical test framework across the major stock markets.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:8 September 2020
Deposited On:02 Oct 2020 05:51
Last Modified:26 Nov 2020 12:17
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:1354-7798
OA Status:Closed
Publisher DOI:https://doi.org/10.1111/eufm.12285
Related URLs:https://onlinelibrary.wiley.com/doi/abs/10.1111/eufm.12285 (Publisher)
Other Identification Number:merlin-id:19739

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Embargo till: 2022-09-01