More ways to estimate Fama-French HML in real-time

To implement the asset allocation described in my whitepaper, the Fama-French “value factor” HML sign must be estimated in real time.  One commenter helpfully proposed RALS:

The Index takes long positions in companies with large RAFI weights relative to weightings in capitalization-weighted indices and short positions in companies with small RAFI weights relative to their weightings in cap-weighted indices.

Each company receives a weight equal to the ratio of its sales (or cash flow, dividends, book value) to the aggregate sales (or cash flow, dividends, book value) across all companies in the universe.

This sounds similar to the construction of HML.

Monthly correlation with HML is 0.65, R2 = 0.42.

Most results fall into the lower left or upper right quadrants, indicating that the sign of HML may be reliably estimated.  Only the sign is required for asset allocation using the method described in the paper.

RALS

 

Another option is CHEP, based on the:

Dow Jones U.S. Thematic Market Neutral Value Index

Measures the performance of an investment strategy utilizing long positions on value companies and short positions on growth companies. Value is calculated using a multi-factor ranking process based on book value to price ratio, projected earnings per share to price ratio and trailing 12-month operating cash flow to price ratio.

This also sounds similar to the construction of HML.

Monthly correlation with HML is 0.39, R2 = 0.08.

CHEP

Clearly RALS is the better fit.  Unfortunately there is only a 3 year history, not enough to replicate the 30 year tests in the whitepaper.

Advertisements

2 thoughts on “More ways to estimate Fama-French HML in real-time

  1. Pingback: The Whole Street’s Daily Wrap for 9/25/2014 | The Whole Street

  2. I’d contact research affiliates to see if you can get data on the index going back 30 years because I’ve seen them quote the performance in some white papers.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s