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I have a decent knowledge of econometrics, but would like to have some help with the procedure of FF regression.Suppose I would like to know if a stock, say AAPL, has outperformed the Fama French 3 factor model.So,I download data from Kenneth French website and run the regression with (AAPL minus risk free rate) as dependant variable and SMB,HML and RMRF as indpt variable.

1) The alpha or intercept value is a "single value" or a number and not a time series.But,I want to know how each day the AAPL stock has outperformed the fame french model.So, if I take the residuals(which will be a time series data) from the above regression,is it the excess returns over FF model? Is the procedure right or wrong?

2) Or should I multiply the betas from the regression with SMB,HML,RMRFcoloumns , then AAPL-(bta1*SMB + beta2*HML + beta3*RMRF).

Thanks in advance.

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By doing (2) you are technically calculating the residuals which you are proposing in (1).

Be aware of look-ahead bias though, you could mitigate such bias by, say, estimating beta 1,2, and 3 according to time series regression from 2005 to 2010. Then use estimated coefficients to calculate the residuals over the years 2010 to 2015 similar to the methodology of event studies.

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  • $\begingroup$ Thank you very much. Is the intuition or idea behind step 1 or 2 correct in order to obtain excess return series over FF model?Does it make sense? Thanks again in advance. $\endgroup$ – Sahoo Jul 23 '17 at 6:38
  • $\begingroup$ It would say something about the performance of AAPL overtime. But the issue with such methodology is that you cannot test for significance. Furthermore, by implementing such methodology you are imposing that AAPL beta 1, 2, and 3 are constant over time which is problematic. $\endgroup$ – user28909 Jul 24 '17 at 0:21

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