In prior posts we have investigated whether it is possible to make an early forecast of the Dynamic Trading Risk Factor return for a specific month, and discussed our motivation for making an early forecast. In this post we examine a necessary condition for that work to be worthwhile — that the returns of an asset due to the factor are not delivered in a clump at the start of the month.

To make things easy for ourselves, we'll start with the Franklin Mutual Shares fund, which we have under the ticker TESIX. We found that this fund has a β of 1.7 onto the Dynamic Trading Risk Factor. With such a strong correlation, hopefully it will show a strong effect if one is there. (Of course, this is actually a bad choice for market timing because the front load fee of over 5% for this mutual fund will likely kill any timing alpha we can discover.)

Here we find a daily β of 2.3 with an apparent linear decay rate of (0.12 ± 0.06) per day. This result has borderline significance (p-Value of 3.5%) and so does not contradict the hypothesis that the factor returns are delivered uniformly throughout the month.