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I am working on this project where I am estimating FF three factors for some European countries. So I collected daily prices in US dollars for these countries since I will be using FF three factors from Kenneth website. I made sure that countries in my sample are included in listed of countries in Fama and French's list of countries. Now I have some questions:

  1. If my data is daily, which Fama and French three factors should I use from Kenneth's website: Fama/French Global 3 Factors [Daily], Fama/French Global ex US 3 Factors [Daily], or Fama/French European 3 Factors [Daily]? and what is the difference between them. I am assuming Fama/French European 3 Factors [Daily] since it only includes European countries but keep in mind that although companies are European but I collected prices in U.S. dollar, not in Euros.
  2. Do I use the same factors file for all the European countries? In other words, If my sample were Spain and Finland, would I use the same Mkt-RF SMB HML and RF for both countries and the only difference would be on the daily return?
  3. If I am not using FF market risk premium, Mkt-RF, and would like to construct my own, do I use U.S. risk-free rate or the European country's risk-free rate? It makes no sense to use U.S. risk free rate but if not mistaking, FF use one month T-bill rate.

Thank you in advance for your help

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It really depends on your goal.

  1. Regarding your first question. If you want to measure how well global factors of value, size explain the cross-section of returns you should use the global factors. If you want to explain the cross-section of returns using only European factors then use the European dataset. It really depends on what you are trying to achieve. Also even if your data is daily you can always convert it to monthly or annual and do the analysis with another time scale. Again depends on your goal.
  2. That is correct if you want to use the FF global or european factors. Only the daily return changes. The factor time-series are the same.
  3. Again it depends on the application. If you want to estimate Mkt-Rf on your own and you are using european factors, then use the european Rf. In any case shouldn't matter much for the results. FF I think are not very clear which Rf they use on the European factors. They might have a paper where they explain it, but I am not sure.
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  • $\begingroup$ Thank you for taking the time out to answer my questions, much appreciated. Well, I am trying to get the idiosyncratic risk for each stock, that is the main goal of the whole project. I understand that I can simply use a one factor model, CAMP, but I am using FF three factors and CAMP as a robustness check. I am not planning on converting daily observations to monthly as I want to observe the daily changes in the idiosyncratic risk. $\endgroup$
    – Saad Al
    Commented Sep 14, 2018 at 16:15
  • $\begingroup$ You just need to decide whether you want the global idiosyncratic risk (global factors) or the idiosyncratic risk not spanned by the european factors. Again it depends on your goal. $\endgroup$
    – phdstudent
    Commented Sep 14, 2018 at 16:17
  • $\begingroup$ I need the idiosyncratic risk for each stock, individually. $\endgroup$
    – Saad Al
    Commented Sep 14, 2018 at 16:20
  • $\begingroup$ I see what you are saying. Good point never thought of that. My objective is to study these mkt independently. Im considering specific characteristic for each market and what to see the impact of these characteristics on the idiosyncratic risk. Each mkt will be studied separately as they have different characteristics and Im not interested in comparing these markets to each other. So I guess in this case using the European factors is useless ( will not give accurate results based on my objective) and I should construct the factors based on the actual mkt cap and b/m for each mkt? Do you agree? $\endgroup$
    – Saad Al
    Commented Sep 14, 2018 at 16:36
  • $\begingroup$ That is correct. $\endgroup$
    – phdstudent
    Commented Sep 14, 2018 at 16:37

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