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Size Sorting in the Fama-French Winner-Minus-Loser Factor

Article Quant Q&A · Author: Yoosang Lee
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Summary

The document asks how to incorporate company size when constructing the Fama-French winner-minus-loser (WML) equity factor. It notes that winner and loser groups are formed using cumulative returns over the period from month t-12 to t-2, then raises a timing question about the market capitalization used to divide stocks into small and big portfolios.

Two possible procedures are posed: update size classifications each month using market capitalization at t-1, or classify stocks once a year using June market capitalization, as in the construction of the size factor. The text provides no answer, supporting evidence, or implementation details. It is therefore a narrowly framed methodology question rather than a complete factor-construction guide. Researchers applying the factor would need to consult the original portfolio methodology and check details such as formation dates, breakpoints, and how returns are assigned before treating either proposed timing convention as authoritative.

Key ideas

  • The WML factor ranks stocks by past returns over the stated formation window.
  • The question is how market capitalization should be used to create size groups within the factor.
  • It contrasts monthly size classification with annual classification based on June market capitalization.
  • The document does not resolve which procedure matches the intended factor methodology.

Tags

EquitiesFactor investingMomentumPortfolio construction
Full text
# Questions on constructing WML factor (Fama French)


# Questions on constructing WML factor (Fama French)












https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

We can see that the Winner and Loser portfolios are determined by the cumulative return from t-12 to t-2.

To construct the WML factor here, size(market cap) must also be considered. What date's market capitalization should be considered?

Since the WML factor is rebalanced every month, should I determine the 'Small' and 'Big' portfolios monthly based on marketcaps of companies at t-1?

Or should I sort it out once a year, just considering June's size, like when I make SMB factor?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.