I'm currently trying to replicate a Carhart four-factor model on the European stock market for a project, but I'm unsure how the factor portfolios are formed (replicating it by using the original approach by Fama and French), more specifically the breakpoints used.
In their 1993 (Common risk factors in the returns on stocks and bonds) paper they write:
We also break NYSE, Amex, and NASDAQ stocks into three book-to-market equity groups based on breakpoints for the bottom 30% (Low) middle 40% (Medium and top 30% (High) for the ranked values of BE/ME for NYSE stocks.
Which I understand as using splitting the stocks into three groups with the same amount of stocks in top and bottom portfolio, but they also write later on:
We use NYSE breakpoints for ME and BE/MEe to allocate [stocks] to five size quintiles... because we use NYSE breakpoints to form the the 25 size-BE/ME portfolios, the portfolios in the smallest size quintile have the most stocks.. Together the five portfolios in the largest ME quintile average about 74% of total value.
Which suggests the portfolio should include the stocks with 30% of the market cap in one portfolio (small amount of stocks) and another with bottom 30% (very large amount of stocks).
Can anyone clarify on the breakpoints being used?