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The Devil in HML's Details

Posted: 9 May 2012 Last revised: 9 Jun 2014

Clifford S. Asness

AQR Capital Management, LLC

Andrea Frazzini

AQR Capital Management, LLC

Date Written: September 26, 2011

Abstract

This paper challenges the standard method for measuring “value” used in academic work on factor pricing and behavioral finance. The standard method calculates book-to-price (B/P) at portfolio formation using lagged book data, aligns price data using the same lag (ignoring recent price movements), and hold these values constant until the next rebalance. We propose two simple alternatives that use timely price data while retaining the necessary lag for measuring book. We construct portfolios based on the different measures for a US sample (1950-2011) and an International sample (1983-2011). We show that B/P ratios based on timely prices better forecast true (unobservable) B/P ratios at fiscal yearend. Value portfolios based on the most timely measures earn statistically significant alphas ranging between 305 and 378 basis point per year against a 5-factor model itself containing the standard measure of value, as well as market, size, momentum and a short term reversal factor.

Keywords: Value, momentum

Suggested Citation

Asness, Clifford S. and Frazzini, Andrea, The Devil in HML's Details (September 26, 2011). Available at SSRN: https://ssrn.com/abstract=2054749 or http://dx.doi.org/10.2139/ssrn.2054749

Cliff S. Asness

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3601 (Phone)
203-742-3101 (Fax)

HOME PAGE: http://www.aqrcapital.com

Andrea Frazzini (Contact Author)

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

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