Asset allocation whitepaper released.

My paper on using Fama-French factors for efficient asset allocation is up on SSRN:

Downloads, comments and questions gratefully received!


The Fama-French three factor model is ubiquitous in modern finance. Returns are modeled as a linear combination of a market factor, a size factor and a book-to-market equity ratio (or “value”) factor. The success of this approach, since its introduction in 1992, has resulted in widespread adoption and a large body of related academic literature.The risk factors exhibit serial correlation at a monthly timeframe. This property is strongest in the value factor, perhaps due to its association with global funding liquidity risk.

Using thirty years of Fama-French portfolio data, I show that autocorrelation of the value factor may be exploited to efficiently allocate capital into segments of the US stock market. The strategy outperforms the underlying portfolios on an absolute and risk adjusted basis. Annual returns are 5% greater than the components and Sharpe Ratio is increased by 86%.

The results are robust to different time periods and varying composition of underlying portfolios. Finally, I show that implementation costs are much smaller than the excess return and that the strategy is accessible to the individual investor.



10 thoughts on “Asset allocation whitepaper released.

  1. Pingback: The Whole Street’s Daily Wrap for 7/10/2014 | The Whole Street

  2. Hello Kevin,
    I tried to replicate your results and am unable. I get stuck with the autocorrelation (1 month lag) of HML. For the period 1995 to 2005 I’m getting 0.038 which may explain why the rest of my results are not close. Are there different factors on the French Fama library?


  3. Thanks so much for sharing your paper with us and particularly a dummy like me 😉 Can I recapitulate and you tell us if I get the model correct? -Thanks again!
    After last trading day in a given month: if VBR monthly performance > DWAS I buy or stay in VBR, other wise I buy or stay in DWAS. However if my monthly performance is negative in the fund I currently am in then I go to cash.
    Does this make sense? -Thanks.

    • That will probably get you close but using HML for the switching should work better:

      HML = 1/2 (Small Value + Big Value)
      – 1/2 (Small Growth + Big Growth).

      = 1/2 (VBR + VTV) – 1/2 (VBK + VUG)

  4. Thanks so much for your explanation. What do you consider a minimum amount to keep trading costs reasonable? Me thinks 10k? – Thanks.

    • I try to keep trading costs below 1%. For 7 switches per year at $20 per round turn, min. portfolio size is $14K. I plan to look at implementing thresholds on HML changes to reduce turnover further.

  5. Hello,

    Just wondering about the real time feasibility of this strategy, as factors from Fama website are provided with delay (at this time, no factor for June for instance, while the switch condition should have been tested more than one month ago)… Would appreciate your thoughts !


    • Good question! The factors can be calculated in real-time using ETF returns (e.g. Vanguard):

      HML = 1/2 (Small Value + Big Value)
      – 1/2 (Small Growth + Big Growth).

      = 1/2 (VBR + VTV) – 1/2 (VBK + VUG)

  6. Pingback: More ways to estimate Fama-French HML in real-time | RRSP Strategy

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