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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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Interpreting Factor Coefficients for an Emerging Markets Fund against the Market and its Benchmark

I ran CAPM, FF3, FF5 and Carhart models for an emerging markets fund against the FF data for emerging markets and against its own benchmark. I am constantly getting negative SMB's which shows relevant ...
Gugu's user avatar
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Factor investing for traders

Can factor investing be used for short term trading ? If yes how macroeconomic and style will be different from long term ?
quanity's user avatar
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PCA factors not uncorrelated

I ran into an interesting case recently. I am trying to construct a set of uncorrelated factors for a statistical factor model. I have started with picking a certain amount of assets (indices) which I ...
Georgi B's user avatar
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79 views

short-term statistical factor models for equities with different trading hours

I wonder if there are existing theory/literature about estimating a short-term statistical factor models for equities with different trading hours. For example if we are estimating a universe with US ...
CuriousMind's user avatar
4 votes
2 answers
82 views

Interpretation of SMB factor loading

I am wondering about the interpretation of the loading of the SMB factor. Some papers (e.g., here) state that $\beta_{SMB}>0.5$ implies a portfolio is weighted more towards small caps. In other ...
Max's user avatar
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Multifactor model assignment problem

Consider the following two-factor model for the returns of three stocks:. Assume that the factors and $e_{j}$ have a zero mean, that all the factors have a variance of 0.01 and are uncorrelated, and ...
Aradhana Saha's user avatar
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30 views

How to create custom factors based on an existing factor model?

I'm searching some literatures or books illustrating how to create custom factors based on an existing factor model. For example, given an existing Barra factor risk model, if I want to add some ...
inf's user avatar
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Analyzing portfolio returns using Fama-French Factors

Here is my problem - I have monthly returns from few portfolios. I also have monthly return from benchmark portfolio. I downloaded F-F 5 factor daily data. Also downloaded Momentum data. Converted ...
deb's user avatar
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Combination of factors

Let's say I have 10 factors and I want to find a combination (basically sum of exposures) of factors (of any length) from this set which has max sharpe. Is there an easy way to find this out rather ...
Anonymous's user avatar
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Alphas vs. portfolio rank w.r.t. factors in Fama-French 3-factor model

In the Fama-French 3-factor model, is there a point in looking at the relationship between the estimated alphas for the 25 test portfolios and the size-rank or value-rank of these portfolios? Also, ...
Richard Hardy's user avatar
1 vote
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Multiple factor Hull-While and yield curve deformation

I am currently studying rate models and I understand that the One-Factor model has some incompleteness: The yield-curve can only be shifted. But I don’t understand what parameter controls this shift ( ...
Adel Chakir's user avatar
2 votes
1 answer
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Why cannot Fama-MacBeth regression identify a zero-mean factor with explanatory power?

Imagine a factor perfectly explain the return of all the stocks in a universe, and the factor has a zig-zag shape around zero (as shown by the image). Since the factor perfectly explain the return of ...
Shawn Hsueh's user avatar
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How to calculate Fama French & Momentum factor returns during Covid recession using their data website?

We know that Covid Recession lasted during the months of March & April 2020. Using Fama French data, how do you calculate returns for factors such as ...
Maddy's user avatar
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Should I resolve factor collinearity before hedging?

Goal: I want to run a portfolio, daily or weekly rebalanced, with a target idio vol %. Thus I will be market neutral, sector neutral and maintain some style exposure at 70-80% idio overall. Okay, this ...
Arjun P.'s user avatar
1 vote
2 answers
246 views

Return forecasting for portfolio optimization

I have some questions related to forecasting returns and how it's used to generate the inputs for portfolio optimization. First, I want to understand why factor models such as FF- 3-factor model are ...
rodrigo's user avatar
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1 answer
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Testing one asset pricing model against another a la Cochrane: a counterexample

I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. I ...
Richard Hardy's user avatar
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76 views

How can we simulate daily return based on multi-factor model?

This is an interesting question for simulation. The question is a bit lengthy but I'm trying my best to make it super clear here. Now I have some multi-factor model, say some US barra risk model from ...
xxxtttsss666's user avatar
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1 answer
42 views

How to formalize and validate models of fundamental factors involved price changes?

Suppose you have some stock X, and its price can be considered a time series. You believe that real-world number Y, like industry or government statistics, which is also time series, influences stock ...
uhbif19's user avatar
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How can I show that these assets do not satisfy a 1-factor model?

Suppose these two assets satisfy a 1-factor model: $$ R_1= E(R_1) + F + ε_1 \\ R_2= E(R_2) - F + ε_2 \\ $$ where: $$ E(F)=E(ε_1)=E(ε_2)=0 \\ Var(F)=1, Cov(F,ε_1)=Cov(F,ε_2)=Cov(ε_1,ε_2)=0 \\ Var(ε_1)=...
Absbert's user avatar
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2 votes
0 answers
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French and Fama - Alpha vs Residuals (Error)

When running a regression to empirically test models like CAPM or the Fama and French Model, why do we test the statistical significance of the intercept? Do we ignore the residual error? Why not ...
Lusitano's user avatar
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Shanken's correction for Fama-MacBeth (1973) generalization of the CAPM

Fama & MacBeth (1973) tested the CAPM against an alternative that the dependence between the expected excess return $E(r_{i,t}^∗)$ and the relative systematic risk $\beta_𝑖$ is nonlinear (namely, ...
Richard Hardy's user avatar
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55 views

Minimizing variance of market neutral portfolio given factor covariance matrix and stock return predictions

If I am given a return prediction and factor exposures for say 50 stocks, as well as the factor covariance matrix, what is the process to determine the weightings of the minimum variance portfolio, ...
helloimgeorgia's user avatar
4 votes
1 answer
412 views

Fama / French 3 Factor Data Not Giving Expected Results

I'm toying around w/ the Fama-French 3 factor data, and I'm having a hard time getting results that approximate what was covered in their paper here: https://www.bauer.uh.edu/rsusmel/phd/Fama-...
Jonathan Bechtel's user avatar
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88 views

What is the definition of aggregate volatility, and how to compute it?

I am quoting the following sentence from Andrew Ang's paper "The Cross-Section of Volatility and Expected Returns". Can someone explain how aggregate volatility is defined and how to compute ...
Ruchit's user avatar
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2 votes
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33 views

Seeking Research on Comprehensive Approaches to Defining the 'Quality Factor' in Financial Analysis

I have noticed that the definition of the "Quality Factor" in financial research seems to be somewhat fragmented, with many studies focusing primarily on individual financial metrics such as ...
johndonym's user avatar
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77 views

How to get Fama-French Factors for current month

I have developed a strategy based, among other things, on the Fama-French model. For the backtest I used the factors from Ken French web side. But there are only historical factors calculated until ...
Martin132's user avatar
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45 views

Normalize positive distributed time series data without window parameters

I have a piece of daily volume and a piece of daily trades data, now I divide them and I get volume/trades as a factor. This factor has positive value and I want it to be normalized to predict the ...
atlantic0cean's user avatar
4 votes
0 answers
231 views

Principal Portfolios Prediction Matrix estimation (Bryan Kelly)

I have recently discovered Bryan Kelly's paper on Principal Portfolios (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623983) and had some doubts about the prediction matrix $\Pi$. He defines $\...
SL133's user avatar
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328 views

CIR model calibration - python

EDIT: or maybe to add, is the below way of calibration better than calculating as: longer term mean b: average of interest rates speed of reversion a: ln(1/drift) volatility σ I am trying to ...
hello543's user avatar
6 votes
2 answers
518 views

Why not use a time series regression when the factor is not a return?

I am trying to wrap my head around the statement that time series regression should not be used for testing a factor model when the factor is not a return. This has been mentioned in multiple posts, ...
Richard Hardy's user avatar
1 vote
1 answer
212 views

R resources for GMM estimation and testing of multifactor asset pricing models

Has anyone seen R script for GMM estimation and testing of asset pricing models such as Fama-French 3-factor or similar? Ideally, I would like to have R scripts corresponding to Cochrane "Asset ...
Richard Hardy's user avatar
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79 views

Portfolio factorization for portfolio optimization

I am looking to do some basic portfolio constructions as an experiment to learn more about it. I have been researching a bit and what I have found is that one of the purposes of factors models (Fama-...
deblue's user avatar
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61 views

Unhedged factor models in trading

Suppose I have a factor model that takes in unemployment and GDP as $X_1, X_2$ respectively in estimating the fair price of asset $Y$. Say I observe that the market price of $Y$ has deviated ...
ron burgundy's user avatar
5 votes
1 answer
688 views

What is the textbook answer to dealing with multicollinearity?

I have recently struggled in interviews, for two quantitative trading positions, by producing weak answers to effectively the same (fairly basic) question. I would like to understand, from a quant ...
Zac's user avatar
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2 votes
1 answer
377 views

How are the risk premiums (SMB, HML) calculated for the Fama-French factor model

The question is assuming a Fama-French model, how should we calculate the expected return of an asset? To do this according to arbitrage pricing theory requires the risk premiums of the 3 factors, but ...
user67149's user avatar
6 votes
1 answer
272 views

Why can I use equilibrium asset pricing models to predict future returns?

This is a general question that applies to the CAPM and any version of the APT (e.g. the Fama & French three factor model). Speaking in terms of the APT: Assuming a simple one-index version of the ...
shenflow's user avatar
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3 votes
1 answer
427 views

How to Maximize Portfolio Sharpe Ratio using Lagrange Multipliers in a Factor Model

I've come across the notes of the 2003 lecture "Advanced Lecture on Mathematical Science and Information Science I: Optimization in Finance" by Reha H. Tutuncu. It describes on page 62 in ...
LattePrincess's user avatar
7 votes
2 answers
1k views

Fama-French factor model: why mimicking portfolios?

I am trying to understand the Fama-French factor model, or any kind of CAPM extensions really. What is really puzzling me is the use of mimicking portfolios. Fama and French create mimicking ...
deblue's user avatar
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0 votes
0 answers
112 views

CAPM model formula for zero cost portfolio?

Let's say I want to run a series of regressions for zero-cost portfolio Y that goes long on stocks based on high variable x and short stocks with a low variable of x. How do I run the regression, for ...
JH1's user avatar
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0 answers
43 views

Good guide to test a new 'factor' and control using other factors in regression model (like Fama French)?

I'm trying to get a better understanding of different ways one can test a new factor within the Fama-French framework? For example, some questions I have are: I want to test if Warren Buffet is in a ...
we_are_all_in_this_together's user avatar
1 vote
0 answers
330 views

Methods for Constructing Mimicking Portfolios for Observable Factors

I've created some macroeconomic factors (e.g. analogs of real GDP growth) that I believe have explanatory power for asset returns. By a factor here, I mean a stationary time-series of real numbers. I'...
rubikscube09's user avatar
0 votes
2 answers
543 views

Mean-variance optimization - objective function formation with factor models

Tradition mean-variance optimization uses the following objective function in optimization: $$ \mu w^T - \lambda w^T \Sigma w $$ Which I'm trying to adapt to a factor model. I've come up with: $$ f \...
LattePrincess's user avatar
3 votes
1 answer
121 views

Compute monthly realized variance for Fama-French factor

I need to compute monthly realized variance from daily data for Fama-French factors. Knowing that Fama-French factors is the difference of return between different type of stocks, for example SMB ...
Neda Fathi's user avatar
2 votes
1 answer
284 views

How do I interpret my Fama-French and Carhart factor coefficients?

I am required to prepare a portfolio containing 10 companies and analyse their returns over 10 years utilising the Fama-French 3 factor and Carhart 4 factor models. I chose the largest market cap ...
YasG's user avatar
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0 votes
1 answer
142 views

Magic Formula Holding Period [closed]

In Joel Greenblatt's Magic Formula why is the holding period one year? Why not rebalance the portfolio once each two years? Or three years?
MCK's user avatar
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1 vote
1 answer
129 views

Fama-French 3Factor Model alpha

I have different large datasets consisting of 1000 stocks each. I want run a FF3 regression I regress my monthly returns (minus riskfree rate) of the dataset against the Mkt-RF, SMB and HML factor. ...
Terminator6677's user avatar
2 votes
0 answers
250 views

How momentum factor is calculated?

I got following code from the Quantopian Lecture about factor investing. Following is calculating momentum factor. Earlier in the lecture, instructor told that, we will sort the securities based on ...
Validus Oculus's user avatar
1 vote
1 answer
99 views

Identify upcoming stock price gaps in Implied Volatiltiy (quant / standardized approach)?

What you often obeserve in implied volatiltiy are higher levels of implied volatility for upcoming events like earnings or presentation of pharma data. For a human being which collects manual the ...
user9579831's user avatar
-2 votes
1 answer
220 views

Industry best practice for minimizing tracking error [closed]

Lets say I have an alpha generating model that forecasts expected returns for SP500 stocks. I formulate a portfolio with 100 stocks having the highest expected return. What is the simplest way of ...
helloimgeorgia's user avatar
3 votes
0 answers
79 views

Aggregation of (cross-sectional) Factor model

Suppose I have a large factor model for security returns, i.e. I have a vector $\mathbf{Y}(t) \in \mathbb{R}^{P}$, with factor loadings $\mathbf{\beta} \in \mathbb{R}^{P \times K}$ over a set of $K$ ...
bfg's user avatar
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