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This week we return to the usual geekery with a short note (it is the holiday season, after all). 

Nathan asks a simple question: "What if Fama and French had decided to use Price-to-Earnings, Price-to-Sales, or Price-to-Free-Cash-Flow instead of Price-to-Book for their High-minus-Low (HML) factor?"

As it turns out, if you stick with the original construction methodology, this choice even impacts how the Small-minus-Big (SMB) factor is constructed!

Using these alternate specifications, Nathan runs a variety of regressions on popular value ETFs and finds that results for value exposure vary significantly, not just in magnitude but in direction.

Nathan's piece this week is a good gut check reminding us not to be fooled by the apparent precision of decimal places. Tools like factor regressions are only as good as their foundational assumptions and the output is always shrouded in distribution of uncertainty. (PDF)


⚡️Corey


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What We're Reading
REPLICATING SKILL: "Across a broad set of popular active FI categories, we find that passive exposures to traditional risk premia (especially exposure to credit risk) explain the majority of FI manager active returns. " Active Fixed Income Illusions
 

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