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I'm trying to figure out how to perform CAPM, the fama french 3 Factors and 5 Factors and the Carhart 4 factors regressions in Eviews.

I downloaded all the data from French's website. The 3 Factors data, 5 factors data and the monthly return on 25 portfolios sorted on size and Book-to-Market-Value.

Question 1:

The Picture below is a screenshot of the monthly returns for the 25 portfolios sorted on size and Book-to-market value obtained from French's website.

What value should I use for the monthly returns of let's say year 1926?

enter image description here

Question 2:

For the Regression in Eviews, should I input the Fama French 3 Factors ($SMB$, $HML$, $R_{m}$) together with returns in question 1 in this equation:

$$R_{i,t} - R_{f} = \alpha_i + \beta_i (R_{m} - Rf) + \gamma_i SMB + \delta_i HML + \varepsilon_{i,t}$$

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For each return series $i$ you want to form an excess return over the risk free rate.

$$ R^x_{it} = R_{it} - R^f_t$$

Then for each return series, run the regression:

$$ R^x_{it} = \alpha_i + \beta_{i1} \mathit{RMRF}_t + \beta_{i2} \mathit{SMB}_t + \beta_{i3} \mathit{HML}_t + \epsilon_{it}$$

If the factor model is correct, the estimated alphas probably will be statistically indistinguishable from zero.

This answer the interpretation of alpha. The intercept alpha from a time-series regression is an error term in the cross-sectional linear relationship between portfolio betas average returns.

If confused, I'd recommend material by Eugene Fama and/or John Cochrane as they are clear and careful writers.

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  • $\begingroup$ Thank you for your answer. really appreciate it. However, I have one follow-up question: From where can I obtain the values for theses variables, Rxit=Rit−Rft? $\endgroup$ – rahaa Jul 30 '17 at 19:37

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