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Questions tagged [factor-models]

Econometric model that have the purpose to measure the effect of different risk measures on portfolio asset returns.

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84 views

Regarding the post-facto predictability of stock market returns

Almost all of the research on equity factor investing deals with a priori predictability of the cross-section of stock market returns (i.e., models which use variables and data that would've have been ...
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35 views

Are the explanatory factors for a firm's expected returns and its expected earnings/valuation multiples the same?

For example, the 3 factor Fama French model explains much of the cross-sectional variation in equity returns. Would these same 3 factors also explain the cross sectional variation in earnings/EV to ...
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1answer
66 views

Klein and Chow Orthogonal Transformation - Lowdin Orthogonalization

I've doing research on the orthogonal transformation in Orthogonalized Equity Risk Premia and Systematic Risk Decomposition They borrow a mathematical technique called symmetric orthogonalization ...
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1answer
49 views

Separating industry and market effects for an equity factor portfolio

I am running a regression to capture the risk factor exposures for a security and estimate its returns. To explain the variation in the security's returns, the predictor variables include a "general ...
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45 views

How to incorporate Fama and French three-factor returns in cross-sectional multiple regression model?

I have a follow -up question about the use of Fama and French three-factor model returns as control variable in a cross-sectional multiple regression: How do I control for a firm's “factor ...
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1answer
65 views

Crowding in factor investing; Solid metrics

I know this is a bit of a golden goose question as if someone had cracked it they'd be laughing. I'm wondering though, if anyone can point me in the right direction for any hard measures of crowding ...
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1answer
75 views

Exclusion of Utilites and Financials in Magic Formula

In Joel Greenblatt's magic formula, see https://en.wikipedia.org/wiki/Magic_formula_investing, why are utilities and financials excluded? What is the reasoning behind this?
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1answer
92 views

Why is the expected value of bias statistic one?

I have been reading about factor models recently. One of the ways in which the developer of these models (Barra/ Axioma) measure the accuracy of their models is by calculating the bias statistic for ...
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2answers
103 views

Lagged Residual as Independent Variable

I am building a factor model to estimate future equity returns. I'd like to include an autoregressive residual term in this model. I'd like to have yesterday's error (the difference between yesterday'...
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36 views

Dealing with missing factors

I have to deal with a factor investing strategy, with the particularity that I can't get a value for the factor for each date for each stock. Practically speaking, this is due to the fact that this ...
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1answer
78 views

Correct choice of SMB factor for regression models

I am currently conducting a performance analysis, where I use the 3-, 4-, and 5-factor models, hence $R_{it}-R_{Ft}=\alpha+b_{i}RMRF+s_{i}SMB+h_{i}HML$ $R_{it}-R_{Ft}=\alpha+b_{i}RMRF+s_{i}SMB+h_{i}...
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32 views

Geometric or arithmetic mean for excess return of Carhart four-factor model?

In Carhart's article from 1997 "On Persistence in Mutual Fund Performance" he has a table (Table II) showing monthly excess return for RMRF, SMB, HML and WML. I'm just curious if anyone knows if it is ...
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1answer
71 views

Period length and maximum data points on estimating the 5-year Beta-factor

I currently read chapter 8 Beta from Bali, Engle and Murray's book Empirical Asset Pricing: The Cross Section of Stock Returns and do not understand their estimation on the five-year Beta-factor (...
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1answer
90 views

Are the Fama-French factor portfolios calculated based on absolute or relative value`?

I'm currently trying to replicate a Carhart four-factor model on the European stock market for a project, but I'm unsure how the factor portfolios are formed (replicating it by using the original ...
2
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1answer
276 views

Rsquared in Fama Macbeth using rolling window

I am trying to do Fama Macbeth regression on some tradable factors using 5-year rolling window updated monthly. However, I am a little bit confused when calculating the final R-squared of the model. I ...
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50 views

FF5 model: What Small RMW means

I want to calculate a cumulative return of (small RMW - big RMW) portfolio. However, I cannot understand what "small RMW(or big RMW)" means exactly. Can you guys explain what it means? And Give me ...
2
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1answer
44 views

Returns and Factors for European Market Kenneth French Database

I am planning to estimate Fama-French model for mutual funds with European equity scope. I am thinking about using the European factors from Kenneth French database, which are computed in USD. The ...
3
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1answer
123 views

Rate of convergence between price and value

In my experience, there are two primary methods of alpha generation. In both cases, assume we know what price is. Method 1: Inference on what the price/payoff will be. Method 2: Inference on what ...
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459 views

Creating Factor mimicking portfolio returns

I have some trouble understanding how to create factor mimicking portfolio returns. As pointed out in this question, Tsay provides a small description, but I am unsure if my procedure is correct. In ...
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106 views

Multiple regression on hedge fund returns

I have a data set of long/short equity hedge funds returns and their associated benchmarks (market indices). I need to form multiple regression on the fund returns using the benchmarks returns as ...
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1answer
163 views

Are the causes of momentum uniform for various asset classes?

Is there any theory which is able to unify and/or falsify existing explanations on the causes of asset price/return momentum? The prevailing theory is that behavioral and cognitive biases lead to ...
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2answers
190 views

Have any other factor “styles” which explain equity returns been uncovered?

I know this is an inherently broad question, so I will attempt to clarify what I mean by factor "styles". I am not looking for a compendium of "anomalies", per se, but rather for categorical themes ...
2
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1answer
806 views

Interpreting the coefficients of Fama-MacBeth regression

According to Fama & MacBeth (1973) two-step regression, you start with estimating the beta factors. When applying the Fama-French 3-Factor model, you first run the linear regression $$r_{i,t}=α_i+...
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1answer
254 views

Calculating fund alpha using Fama-French 3 factor model?

My dissertation requires me to evaluate fund performance, and for that I need to find the alpha for each fund. I have 173 funds total. I have all the inputs for the 3-factor model, and I realise ...
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20 views

Which Firm Characteristics may have an influence on Coskewness

Latest since Kraus and Litzenberger (1976), higher order moments of the return distribution are considered relevant for asset pricing. In line with that, Harvey and Siddique (2000) and Barone Adesi ...
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49 views

Excessive trading due to sharp cutoffs

I am running a stock trading system based on traditional factors (value, momentum, etc). I generate a combined factor score for each stock on every day at the close, and at the open of the next day, I ...
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41 views

Specific Asset Risk Modelling in Multi-Factor Models

Barra seems to use the following model for specific asset risk from page 67-68 of this guide to factor models: www.cfapubs.org/doi/pdf/10.2470/rf.v1994.n4.4445: $\mu^2(t)$ = S(t) [ 1 + v(t) ] where ...
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1answer
26 views

Factor Models: uncorrelated errors don't impact covariances of assets

This question stems from time series factor models (e.g., CAPM, Fama-French, etc.), but is a broader idea. I am trying to comprehend how adding noise to a time series (e.g., error/residual from a ...
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2answers
919 views

Portfolio Risk Decomposition - different methodologies

I understand that there are several methods for decomposing contributions to risk (be it variance, std dev, etc.) in a portfolio of assets. For example, a response in this post indicates that there ...
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1answer
658 views

How to compute a Fama-Macbeth R-Squared (R2)?

I'm reaching out regarding the R-Squared of a Fama-Macbeth regression. This is often reported in econometric results but I have yet to find a good explanation of how it is computed. Specifically, if ...
2
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1answer
220 views

How are Fama French Factor Returns for the last 3 and 12 months calculated?

In the Fama/French data library the monthly research factors for the Fama-French-3-Factor-Model and the Fama-French-5-Factor-Model are presented. I don't see how they are calculating the factor ...
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39 views

Is there a covariance term in the variance of an n matuity return $r_{t+1}^n = n y_t^n - (n-1)y_{t+1}^{n-1}$ where $y$ is the yield?

I'm calculating the variance of returns based on the variance of yields (which are based on the variance of the 3 factors in the 3 factor model used with the Nelson-Segel function). I'm wondering if I ...
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1answer
70 views

How we compare 2 portfolios one with risk the other with characteristics?

I have 2 questions which i can't seem to find no matter how I search. so: 1) If we have 2 portfolios. One based on risk-return tradeoff (with variables HML, SMB and beta ) (Fama French, 1993) and the ...
2
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1answer
215 views

pure factor return for factor model

I am reading a paper. The authors use the multivariate regression to calculate the pure factor return $\beta_F$ using the following equation: $$Return_{t+1}=\beta_F f_F + \beta_{RF_1} f_{RF_1} +⋯+ \...
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2answers
624 views

How to calculate Fama-French factors?

How do I calculate the three factors? The first "market" factor seems straightforward. However the SmB and the HmL factors seem to require accounting data. Also, how does one calculate the momentum ...
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69 views

Factor models based on fundamental surveys: how to deal with the pointy end?

I'm a quant working in a mainly fundamental shop. Analysts are asked to score things like management or industry trends of stocks in their "watchlist", and I am now trying to weave the results into a ...
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1answer
389 views

Fama french model: Daily excess return calculation

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 ...
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82 views

How to control for common risk factors in a regression analysis of single stocks?

I am planning to regress (excess) stock returns of single stocks against my main explanatory variables. To get more meaningful results, I want to control for common risk factors, e. g. those proposed ...
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2answers
541 views

Portfolio Weights to Maximize Information Ratio (Finding Alphas)

In Finding Alphas, Chapter 1, Introduction to Alpha Design, the authors state: An alpha can be represented as a matrix of securities and positions indexed by time. The value of the matrix ...
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1answer
374 views

How do I control for a firm's “factor loadings” based on the Fama French model in a regression model?

I asked this question before, but in the wrong community (sorry): I want to explain stock returns in a regression model. Besides regressing against my main explanatory variables, I want to control ...
3
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1answer
109 views

Holdings based style analysis

This question is not very technical. I have a file with holdings (both for the fund and the benchmark) of a number of securities and need to do a style allocation analysis. For these securities, I ...
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0answers
74 views

Fama-French Global Factor Universe

I'm trying to replicate the Fama-French Global 3 Factor portfolios, but don't know how they define their universe. There are some details on his website, but they only cover ranking methodology and ...
2
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1answer
373 views

Fama/French momentum replication: risk-free rate missing on one of the legs?

I am using a python script to replicate the monthly UMD factor, disregarding small caps (ie, focusing only on the "BIG HiPRIOR" and "BIG LoPRIOR" sub-portfolios in prof. French's website). For that ...
2
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1answer
459 views

Obtaining the Data and Calculating the actual Fama-French Factors for top NDXT companies

I am very new to the world of finance (a statistician) and I would like to run time series regressions for 3 and 5-factor Fama-French model in R but before I do that, I am very puzzled about obtaining ...
2
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0answers
228 views

kalman filter for a multifactor model in R

I am trying to set up a time varying factor model for the purpose of return decomposition via kalman filter. Following this example and slightly modifying it so as to accommodate for more than one ...
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1answer
389 views

How does one create an alpha signal

I am curious and want to do some personal research into alpha signals, but I couldn't find much relevant information. What I think will be the way to is to start with a return series, build a long- ...
3
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1answer
308 views

question about Quantopian alphalens

Quantopian has this package alphalens to do series of analysis on factors. I decided to dig in the code and make sense of the analysis. The question I have is: There are a lot of demean in the ...
2
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1answer
174 views

Practical way to estimate price sensitivity to unexpected earnings (i.e., post-earnings drift)?

Post-earnings announcement drift is a well documented anomaly in financial research. In 2017 May NBER paper, Replicating Anomalies, the authors found that anomalies related to standardized unexpected ...
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187 views

Regressing non-USD returns on FF 3-factor returns

I am analysing some portfolio returns from the perspective of a Danish investor, i.e. in the local currency, DKK. I want to regress portfolio returns in DKK on the returns of a 3 factor Fama & ...
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253 views

How to backtest a factor by building a factor-tilting portfolio

A recent research paper from Wolfe Research suggests an alternative to the traditional "long top quintile, short bottom quintile " approach to backtesting a factor. It says to construct a factor ...