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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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36 views

Calculation of Fama-French risk factors

Background: I am conducting some research on equity returns across Denmark, Finland, Norway and Sweden. The analysis is seen from a Danish investor’s point of view, and therefore I have currency ...
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31 views

How do we know if an additional factor has improved the predictive power of a Fama French 3 factor equity model?

We're building a multi-factor model for climate risk by adding an additional factor for carbon risk on top of a Fama and French 3 factor model. This is open source at https://github.com/opentaps/open-...
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48 views

How to conduct statistical test to see if certain factors impact trading streategy

Since the seminal paper by Fama and French(1993) that uses size, market and value factors to explain extra market returns on the equity market, people have conducted tons of research on equity factor ...
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36 views

Where do I find MSCI factors historical data

I need to get monthly MSCI ACWI factors data (Momentum, Value, Quality, Minimum Volatility etc.). I don't see them in End of day index data search. I found only ...
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75 views

factor hedging erodes portfolio alpha

I am hedging a long-short equity portfolio for statistical factors, and finding an improvement in sharpe but not surprisingly an erosion of portfolio alpha (ex ante and ex post). No one factor is ...
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50 views

J-stat question on Linear Factor Models + Simulation, Wald test

I am exploring the wonderful library by K. Sheppard et al. on linear models applied to asset pricing. In particular, Fama Macbeth and two-step regression (leaving GMM for later) My question is ...
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1answer
54 views

structural model - exposure estimation

The following example is from the book Active Portfolio Management by Grinold and Kahn. Suppose we have the factor returns and want to estimate the exposures/factor loadings. Say the factor returns ...
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49 views

Expected returns and Fama-French Factor Model

It is my understanding that for any given stock, the sample mean of historical returns is not a good proxy for the stock's expected return. In fact, the return on a stock needs to be estimated via ...
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60 views

How to implement a factor model from scratch?

Imagine we have price-volume data set and fundamental data set which gives us all the info we need (e.g,. OHLC, earnings, dividends etc.) for stocks listed in a market for long time period. I.e., you ...
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48 views

What is the market share of MSCI Barra Equity Model?

My understanding is that MSCI/Barra's model has a very large market share in funds and banks, but I cannot find out how large is the exact market share. Is there any data on this, or can someone ...
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36 views

Factor Models vs. Risk-Adjusted Performance Measures

I am building a study focusing on portfolio returns relative to a number of portfolios constructed using various ESG screening techniques. My intention is to measure and compare the performance of '...
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32 views

Where can I get historical updates to equity risk models (e.g. Barra)?

In risk models (such as Barra), new factors are added over time, and the model structures are also changed over time. I hope to get as much information on historical changes as possible. Apart from ...
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22 views

How do I calculate the current value for SMB, HML etc. for Fama French Model

So I have taken the data from FF website, done a regression and now I have the coefficients to use. I am unable to understand how to get the smb, hml and wml for the current period and through that ...
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227 views

How to determine the risk premium from the Vasicek one factor model?

The short rate under the Vasicek one factor model under the real-world measure $\mathbb{P} $ follows : $$ dr(t)=(a\theta - (a+\lambda \sigma)r(t))dt + \sigma dW(t),$$ $$ r(0)=r_0 $$ where $ \lambda $ ...
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Literature on liquidity risk: Amihud (2002) vs Pastor and Stambaugh (2003)

Why is it the case that literature which studies liquidity risk often use the Amihud (2002) measure, whilst in factor pricing a liquidity portfolio based on the Pastor and Stambaugh (2003) liquidity ...
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Could anyone please help me in understanding how the authors calculated "SMB-hedged with QMJ" at page number 489 of the paper?

Link for the paper: https://www.sciencedirect.com/science/article/pii/S0304405X18301326. "Size matters if you control your junk" by Asness et al. (2018) It's Figure 1.
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Why does adding a negative risk premium to the short rate avoid the occurrence of inverse yield curves?

I am reading about the Vasicek One Factor short rate model and how to implement a change in measure from a risk-neutral to real-world measure, when I came across this comment: Adding a negative risk ...
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Does a factor model always include traded portfolios or can it also be other variables?

Does a factor model always include traded portfolios or can it also be other variables? For example, a four factor model of $R^e_{it}=\alpha_i+\beta^{M}_{i}\text{MKT}_t+\beta^{SMB}_{i}\text{SMB}_t+\...
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45 views

How to build Fama-French model factors SMB and HML to compare sustainable index to conventional benchmark?

My goal is to analyze and compare the performance between socially responsible indices and conventional ones. I am comparing for each region (Europe, UK, World, US) a sustainable index to a ...
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22 views

Checking Regression Inputs & Outputs (Factor Regression)

I am looking to check the assumptions and interpretation of the output of a regression that I have run for factor exposures in a long/short equity portfolio: Portfolio is long/short equity with a net ...
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1answer
55 views

What about autocorrelation and heteroskedasticity in Fama French?

I am analysing ESG and conventional mutual funds. I decided to measure the extra performance of each category using the Fama French 4 factor model, but it seems to me that in previous literature they ...
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80 views

Why do bank stock returns increase from increased credit risk?

As part of my bachelor's thesis, I am running the following regression on daily bank excess returns: (r-rf)=Beta * Market excess return + Beta * Level(5Y)+ Beta * Credit Risk + error Level(5Y) is the ...
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26 views

Multiple independent variables (returns) on common dependent variables (Fama-French risk factors): Efficiency and data structure in Python

As a common topic in factor investing, I wish to implement the well-known Fama-French regressions on several stocks (+2000 IDs). In a deep sense, factor regressions tell how the right hand (returns) ...
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2answers
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Why in Fama-French factor model relative market capitalization and book-to-market aren't used directly for predicting return rate?

Fama and French use the following formula for predicting stock returns \begin{align*} r=r_{riskfree} + \beta_1(r_{market}-r_{riskfree})+\beta_2(SMB)+\beta_3(HML) \end{align*} which basically means ...
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Novy-Marx Profitability "Excess" returns - What does Excess mean here?

I am reading Novy-Marx's paper titled "The other side of value: The gross profitability premium". Throughout the paper, he mentions excess returns in several tables, but I cannot find any ...
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21 views

Fama-Macbeth 2nd Step - use absolute or real values for intercept and lambda?

I'm testing CAPM's performance during 2020. I have estimated Betas using Fama-Macbeth Approach (1st step). Now, I am trying to calculate t-stats for 2nd stage cross-sectional regression. I've run 12 ...
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65 views

Why factor return is estimated given factor exposure?

When using factor risk model, especially fundamental risk model, factor exposures are given and factor returns are estimated using regression method. However, I cannot intuitively understand why ...
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29 views

Fama-Macbeth CAPM Test First Stage Portfolio Construction Problem

I'm trying to test CAPM's performance during 2020 and can't decide which method of portfolio construction to use: Use 2010-2015 for portfolio sorting and 2015-2019 for estimating time-series Beta of ...
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51 views

Size factor - Root Market Cap Weighted

I saw in a paper for specifically the Northfield equity risk model that when constructing their factors they use the standard, time series regression to get each stock’s beta to a specific factor and ...
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1answer
223 views

Factor alignment problem in portfolio optimization

I'm taking a course 'AI for trading' in udacity, and there is a part I really want to make sure. The lecture keeps teaching me that there are alpha factors (driver of return) and risk factors (driver ...
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49 views

Alpha - Time Series vs Cross Section Approach

I am currently reading Cochranes book on asset pricing. However, I get confused about one thing. He says that one could test a factor model (I will use the CAPM, just as he does), via a time series ...
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14 views

Fama Macbeth Factor Modelling Run Variable Directly

Why must we find the beta of a variable first before running the cross sectional regression for a factor model. Why can’t we just directly run the cross section of market cap versus return say for ...
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15 views

Interpreting factor coefficients when correlation flips

I am looking at mainly value and growth factor coefficients of a fund during the recent Covid market “crisis”. I have found that said fund had a negative coefficient to value at the start of 2020 (let’...
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44 views

Brinson attribution for arbitrary set of style factors (size, momentum, vol, etc)

I'm looking to do a Brinson performance attribution on a portfolio of stocks where instead of decomposing the returns in terms of sectors we use factors instead. Basically, I want to do what Style ...
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1answer
52 views

Constructing Idiosyncratic Risk Factor

I am studying idiosyncratic volatility. After applying the Fama Frech 3 Factor model with its Marktet, SMB and HML factors I want to build a factor based on idiosyncratic volatility. Can I just build ...
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398 views

how to use factor models to construct a hedging portfolio?

This is a new project for work that I am stuck on and looking for help: If i am given a factor model (e.g. barra) and a equity portfolio we're trying to hedge, how can I come up with a hedge portfolio ...
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111 views

Fama McBeth - Significance

The very last step of the Fama McBeth procedure is to aggregate the estimated regression coefficients by taking their mean. The mean is then the estimate for the "overall" regression ...
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2answers
766 views

how to implement momentum strategy for stocks in R

Good morning, I'm implementing factor investing strategies to choose stocks to insert in a portfolio. I have calculated low volatility factor and now I would to calculate momentum of each stock so ...
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1answer
508 views

Factor investing and PCA

I'm struggling to understand how Principal Component Analysis (PCA) is used in Factor Models of returns. For example, in the JPMorgan paper (p.19) the authors write: In a multi asset portfolio, factor ...
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55 views

Measuring Information Coefficient and Sharpe Ratio

I have been looking through / using Quantopians' Alphalens library to measure/create new factors, and I had some questions in evaluating the credibility of the factor. This is what I have: I have ...
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65 views

What's the intuition behind factor grouping?

From the book "Finding Alpha", written by a popular quant fund WorldQuant, explains many techniques about quantitative investing but intentionally omits many of the caveats and applications ...
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1answer
115 views

SML Interpretation

I follow this paper and estimated two different asset pricing models via systems of deep neural networks. Both models have the exact same input: firm-specific features for 10'000 (unique) US stocks ...
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15 views

Identifying factor model shifts in different periods

Given a set of K independent variables X = (x1, x2, ..., xk) and a dependent variables y, I try to run the step-wise regression ...
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51 views

Nasdaq and HML factor positive coefficient

I am using the HML factor from Fama French’s website and have always assumed that a negative coefficient indicates that the portfolio has a tilt towards growth stocks. When I however perform a simple ...
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1answer
342 views

Fama-French vs. Arbitrage Pricing Theory of Ross

Is there a specific reason for why Fama-French papers on CAPM extensions do not refer to APT of Ross? In textbooks, APT is always an extension of CAPM and the foundation of extending the set of risk ...
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1answer
103 views

Factor model for Gold has low adjusted R2

I am trying to build up a factor model for gold. To be able to identify the correct factors, I did a correlation analysis between a few factors vs gold and I integrated this analysis with what I saw ...
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1answer
145 views

Factor Model Regression Market Factor Statistically Insignificant After Adding Extra Factors

I am running a simple 4 factor model which includes the factors: Benchmark (Market - FortyConsumerSixtyHealthcare), SMB, HML and MOM. When I simply apply the regression to the portfolio returns and ...
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2answers
101 views

How can you use factor modelling to improve your current portfolio [closed]

Firstly let me apologise if this has been asked on on here before - I went through some of the factor modelling post on here but I've struggled to find the answers. I am new to the quant world and I ...
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165 views

Why is diversifiable risk unrewarded?

I am currently looking through some actuarial study materials (CM2, formerly CT8) in which models of asset returns are being discussed. One such model is the market model (A.K.A The single-index model)...
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40 views

FF factor benchmarks

I have a question to think about. I have constructed a portfolio of AMEX/NYSE/NASDAQ firms. After some data manipulation and cleaning I am left with some 4000 firms over the complete sample (max 1600 ...

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