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

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.