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15
votes
1answer
5k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
10
votes
4answers
773 views

What are the risk factors in analysing strategies?

What do you think of strategies displayed on timelyportfolio.blogspot.com? I really like the fact that there is some code to reproduce the strategies, but they seem very elementary because he does ...
8
votes
4answers
2k views

What does it mean to modify the factor loadings of a credit risk model?

I came across an example where a well-known weakness of a credit risk model was dealt with by augmenting some of the existing risk factors via increased factor loadings. This made the the model more ...
6
votes
2answers
595 views

How to interpret the French-Fama SMB factor?

I regressed ten portfolios on the Fama French factors and get significant loadings on the SMB factor. However, if I look at the actual average market cap of these portfolios, the portfolios with the ...
6
votes
2answers
606 views

Non-negative matrix factorization for factor analysis of stocks

I stumbled over the term Non-negative matrix factorization in presentations such as Application of Machine Learning to Finance and this Big Data in Asset Management. The basic idea is to decompose a ...
6
votes
0answers
111 views

Why is Weighted Least Squares necessary in fundamental factor model?

Why is Weighted Least Squares necessary in fundamental factor model while it is not in a standard Macroeconomic factor model? I understand that $\mathbb{E}[\epsilon^2_{it}]=\sigma_i^2$ varies across ...
3
votes
4answers
843 views

Robust Returns-Based Style Analysis

Sharpe's Return-Based Style Analysis is an interesting theory but flawed in practice when working with long-short funds or funds that are changing strategies over shorter periods of time due to the ...
3
votes
0answers
44 views

Interplay of statistical factors (PCA) and market factors (value, momentum, low vol, …)

Is there any research done on the interplay between statistical factors (as a result of principle component analysis PCA) and the market factors (especially value, size, low vol, momentum, quality)? ...
3
votes
0answers
42 views

Estimating factor returns with linearly dependent loadings

Given an $n\times 1$ vector of asset returns $r$, and a $n\times k$ matrix of factor loadings $X$, we can express the asset returns in terms of as-yet-unknown factors $f$ using $$ r = Xf + \epsilon $$...
2
votes
1answer
143 views

After PCA on original factors, how to tell which original factors are dominant?

When doing the PCA analysis, you end up with eigenvalues which are ordered by how much variance they explained for each eigenvector. Say, the eigenvectors since they are orthogonal, do not represent ...
2
votes
1answer
35 views

Help understanding factor modeling, solving for residuals

I am trying to understand and implement a factor model, and I think I might be having some issues. I am trying to solve for the residuals in the equation: $$ R_{i} = \sum_{A=1}^{K}\beta_{iA} f_{A} + ...
2
votes
1answer
266 views

Combining covariances?

Consider an economy with assets with return processes $A$, $B$, $C$, $D$. Consider a weighted index with return process $I=aA + bB + cC + dD$ where $a,b,c,d$ are coefficients, and $a+b+c+d = 1$. ...
1
vote
1answer
367 views

Calculating Variance Explained from PCA Loadings

I have a return history for a universe of risky assets and I've run a principal component algorithm and obtained a loadings matrix (num_factors by num_assets) for the first 5 factors. I have a ...
1
vote
2answers
2k views

How can I calculate Fama-French betas for a particular stock?

For a particular stock, what's the simplest way to calculate betas for the Fama-French factors SMB and HML?
1
vote
1answer
365 views

How to use financial ratios in a factor model?

I am trying to understand how factor loadings in a general factor model are computed. For simplicity sake, lets assume a simple model: $$ R = B \times F + \epsilon $$ $$ R = N \times 1 $$ $$ B = N \...
1
vote
1answer
144 views

how can I calculate the factor loading (beta)?

I am writing my Thesis about hedge funds performance measurement and I want to use the seven factor model proposed by Fung & Hsieh (2004). Now, I am struggling to find out how to calculate the ...
1
vote
0answers
31 views

Fama-French Factors for ETFs and MFs

Is there a public source or a paid service that provides FF3 (or FF4 = "Carhart") factor loadings for US traded ETFs and Mutual Funds? Something that is regularly updated and that provides comparable ...
1
vote
0answers
123 views

Variable Selection with Kalman Filter

I'm trying to estimate factor loadings on portfolios over time for portfolios that are traded pretty frequently. I have a sense that several portfolios are loading on the Fama-French HML factor ...
0
votes
1answer
55 views

Factor model to Portfolio optimization

By using the Fama and MacBeth methodology, I have identified the significant factors that explain the returns of my stocks. Now, I want to build a portfolio and backtest it. For that, I am trying ...
0
votes
0answers
27 views

Practical Implications of Fama French Loadings

Suppose you have historical returns for a portfolio. You regress these against the Fama French factors to get the loadings/coefficients. How can you use this information? For example, can you use the ...
0
votes
0answers
33 views

Constructing Dedicated Risk Premia Strategies

I am trying to figure out the "best" way to construct investment strategies which are focused on capturing specific risk premia individually. From my understanding the traditional approach to capture ...