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

44 Pages Posted: 28 Jun 2019 Last revised: 26 Aug 2019

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Roger Rüegg

University of Zurich

Date Written: June 27, 2019

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.

Keywords: Factor timing, equity style timing, integrated approach, momentum

JEL Classification: G1, G11, G14, G17

Suggested Citation

Leippold, Markus and Rüegg, Roger, Fama–French Factor Timing: The Long-Only Integrated Approach (June 27, 2019). Available at SSRN: https://ssrn.com/abstract=3410972 or http://dx.doi.org/10.2139/ssrn.3410972

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Roger Rüegg

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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