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Fama–French factor timing: The long‐only integrated approach
Author(s) -
Leippold Markus,
Rueegg Roger
Publication year - 2021
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12285
Subject(s) - portfolio , transaction cost , momentum (technical analysis) , econometrics , economics , scrutiny , trading strategy , stock (firearms) , factor analysis , covariance , market timing , covariance matrix , computer science , financial economics , microeconomics , mathematics , statistics , engineering , algorithm , mechanical engineering , political science , law
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 minimising 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.