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If the factors have information content, I expected factor portfolios constructed using recent financial statements should outperform portfolios using stale data.

To test this, I used the Professor French’s database. I compared the factor returns in the first 6 months after rebalancing against the returns in the second half.

In about 80% of the data sets, the factor returns were higher in the second half of the year. In most cases the difference was not significant. Small minus big stands out because it had negative first half performance and positive second half performance in every data set I tested.

This is the opposite of the result I expected. I expected most to be insignificant or higher returns in the first 6 months after rebalancing.

Maybe it could be explained by new annual reports coming out in the second 6 months (first 6 calendar months). Are there other, better explanations / other papers I should read that may help me understand these results?

My script is on GitHub, here: https://github.com/Charles-Fox1234/FactorResearch

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    $\begingroup$ Fama French portfolios are formed in June. Can you try explicitly controlling for the year to begin on July 1st. $\endgroup$
    – Rehan
    Apr 10, 2019 at 7:35
  • $\begingroup$ @Rehan, it is done implicitly. The first row in each data set is July returns. The first half / second half split is done after 6 months of returns. $\endgroup$
    – Charles Fox
    Apr 11, 2019 at 17:49

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In APT, factor decays. So you have to choose a appropriate rebalancing interval - a trade-off between transaction cost and time value of information.

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