Fama–French Portfolio Eligibility and Holding-Period Returns
Summary
The document explains which stocks qualify for the annual Fama–French size and book-to-market portfolio sorts. Portfolios are formed at June end using market equity for size and book-to-market information based on prior fiscal-year book equity and December market equity. Returns are then value weighted over the following July-to-June period.
Eligibility depends on the required formation-date data, including market equity at the specified dates and positive book equity for the prior year; stocks need not have valid returns throughout the entire holding period. A stock with the necessary formation data remains part of its assigned portfolio until its return data ends, including through delisting. A newly listed stock without the prior-year data enters a later sort. The explanation is simplified and points to further methodological details, including treatment of negative book-to-market values and delisting returns, as important caveats for replication.
Key ideas
- Annual portfolios are formed at the end of June using size and book-to-market characteristics.
- Formation uses specified prior-period market equity and positive book equity data.
- A stock need not have return observations for every month of the holding period to qualify.
- Eligible stocks contribute returns while data remain available, including through delisting.
- New listings without the required prior-year data enter a later annual formation.
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# Fama French sorting # Fama French sorting I am trying to calculate my own monthly fama french factors SMB and HML and I have a general question about a final screening act. I understand that to sort companies in june of year $t$ they need to have market value, book equity data etc, but what about the period from july of year $t$ until june $t+1$ when I calculate the returns for the 6 portfolios? In these 6 portfolios do I only include companies which have from july of year $t$ to june of year $t+1$ companies which have for the entire (!) period from july of year $t$ until june of year $t+1$ a viable return and a viable market value? So for example if one of my companies has a missing return value for, say, december 2000, then I can not include it in the june 2000 sort for the portfolio creation? ## Answer by skoestlmeier (score 3, accepted) https://quant.stackexchange.com/a/41759 Let's start replicating the Fama-French portfolio construction:* - Portfolios are created at the end of June each year $t$, based on size and book-to-market ratio (BE/ME). - The size breakpoint for year $t$ is the median NYSE market equity at the end of June of year $t$. - BE/ME for June of year $t$ is the book equity for the last fiscal year end in $t-1$ divided by ME for December of $t-1$. - Calculate the value-weighted return for the portfolios for July $t$ to June $t+1$. As stated on Kenneth French website: > The portfolios for July of year $t$ to June of $t+1$ include all NYSE, AMEX, and NASDAQ stocks for which we have market equity data for December of $t-1$ and June of $t$, and (positive) book equity data for $t-1$. So there are three cases: - If there is no data for market value in December $t-1$, June $t-1$ or book-value for $t-1$, this stock can not be considered in the portfolio sort. As there is no data for including this stock in the breakpoint calculation, it is also excluded in calculating the portfolio return (as it is not clear in which portfolio it should be added). - If there is valid data for a stock in the quoted points of time, it is considered in the breakpoint calculation and in the portfolio return calculation. If a stock is delisted, it's return is calculated until delisting (and therefore until data is available).** - If a stock is newly listed e.g. in April of year $t$, it is first added in the breakpoint (and portfolio return) calculation the next year (since there is no data for $t-1$). * These steps are simplified for clarification. Read their paper common risk factors in the returns on stocks and bonds for all the details, e.g. excluding stocks with neg. book-to-market ratio etc. ** Be aware of the delisting-return in the CRSP universe, which is described in detail in Bali/Engle/Murray (2016), Empirical asset pricing: the cross section of stock returns, John Wiley & Sons., chapter 7.
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