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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Marginal Risk Contribution under Factor structure

Given the factor structure below with K factors, the return for N assets is given by (under matrix notation): $R =\alpha + \beta F + \epsilon$ where $F$ is matrix of K factor returns and $\beta$ is ...
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Why do we need regression in Barra factor model?

I am trying to understand Barra factor model, so bear with me. I will describe my current understanding because maybe I am missing something. We have k factors and some defined formulas to compute ...
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How to test a risk model?

I'm reading the Barra risk model handbook (2004) available online and trying to understand the methodology. I've read a few materials on portfolio theory, so I can get at least the theoretical ideas ...
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Statistically Significant Four Factor Alpha for Monthly Returns Regression but non stat sig alpha for Daily Returns. Which one should I trust?

...
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How to get started with ABS?

I am reading about ABS avoiding esoteric instruments with complex structures and I want to learn about pricing methods and trading of these instruments thinking about futures applications for ...
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How do you cross-sectionally standardize a variable?

i am doing research on a so-called carbon beta where I made a portfolio that takes a short position in 'green' stocks and a long position in 'brown' stocks, from a period of 2005 until 2020. So from ...
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Should I include factor loadings as explanatory variables for regression of abnormal and raw returns?

My research is to explain stock returns in a regression model. My dependent variable is raw returns and abnormal returns calculated from 3-factor model (Fama and French). Besides regressing against my ...
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Covariance Matrix by Multi-Factor Model

I have been trying to find literature for the derivation of the covariance matrix, following a multi-factor model. I have had no luck at all, every single article I have found on the web already ...
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factor evaluating methodology with factor return and factor exposure

studying with a factor model, I get confused more and more as I think about factor exposure and factor return The concept (or mechanism) I get used to is evaluating a factor's Long Short Return(Q1-Q5) ...
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Modelling assets driven by a single factor together

I have a dataset consisting of broker prices (time-series) for OTC oil derivatives (as in actual Naphtha derivative, not financial derivative) in commodities. Each oil product (derivative) has 12 ...
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Liquidity factor data 2021

I am looking to adjust my research for the liquidity factor found by Pastor and Stambaugh (2003). Unfortunately Robert Stambaugh's website (https://finance.wharton.upenn.edu/~stambaug/...
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How to correctly use Fama-French factors (from investment portfolio perspective)?

I have several questions regarding Fama-French and other (for instance, BAB) equity return factors for practical purposes (portfolio construction, portfolio risk analysis, portfolio return analysis). ...
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The relationship btwn RV-IV and realized skew

In studying skew I've been advised to focus on understanding on components that affect it. One such component that's been recommended to me is the relationship btwn RV-IV and realized skew. ...
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Square root specification of parameters in factor models

The following formulation is from Vasicek and refers to the cond. probability of the loss of a loan (equ. 3 in the reference): $$p(Y)=\Phi\left(\frac{\Phi^{-1}(p)-\sqrt{\rho}\,Y}{\sqrt{1-\rho}}\right)....
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Fama MacBeth regression standard errors: sampling variations in the first stage

Following the notation of this post, the standard errors of the second stage coefficients is computed as $$\sigma^{2}(\hat{\lambda})=\frac{1}{T^{2}} \sum_{t=1}^{T}\left(\hat{\lambda}_{t}-\hat{\lambda}\...
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State-of-the art factor models for intraday event studies

I want to do intraday event studies. For this purpose, I have stock data on a 15 minutes interval. What is/are currently the state-of-the art factor model(s) for calculating intraday (ab)normal ...
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GRS test (Gibbon, Ross and Shanken (1989) in Python

I'm writing a term paper, where we need to compare the Fama-French 5-factor model and a q-factor model. For the empirical part, I'm using the Python-based Linearmodels library by Kevin Sheppard. My ...
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Replication of results shown in 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray

I'm currently trying to reproduce some results shown in the book 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray. More precisely, I try to compute Table 7.3 and 9.1. ...
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Is it compulsory to use seemingly unrelated regression method while running the Fama French style 25 portfolios on the independent risk factors?

I have scanned rigorously on the internet but the information regarding the SURE methodology seems surprisingly very little (at least with regard to its application in finance). I would have imagined ...
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how should I update a return factor's orthogonalization parameters?

We have constructed a return factor for a Fama-French-Carhart type factor model which adds a "BMG" factor for climate risk exposure (see open-climate-investing) This BMG factor is ...
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Cointegrated time-series with a persistent spread

Assume $X_t$ and $Y_t$ represent the prices of the same financial instrument traded in two different markets (in particular they are cointegrated). For some reason the long run equilibrium between $X$ ...
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Fama-MacBeth regression in Python using the linearmodels library

I have a question about the Fama-MacBeth regression in Python. There is a library called linearmodels which contains this procedure under ...
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characteristics of factor portfolios

In the paper Characteristics of Factor Portfolios (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1601414), when it discusses pure factor portfolios, it says that simple style factor portfolios ...
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Factor investing in government bonds

Could someone direct me to papers I can find on factor investing for construction of actual local bonds (not using etfs or sovereign bonds) in a portfolio for any local market. For me, I’m trying to ...
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how to measure the stability of factor loadings?

Is there any research on how to measure the stability of factor loadings, for example from Fama French/Carhart type factor models? The goal is to test different ways to construct a risk factor, such ...
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Double sort portfolios [closed]

I am studiying the impact of two variables A and B on stocks returns. When I sort the stocks individually, I find that the long-short portfolios returns obtained for A and B exhibit high correlation. ...
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Testing a new factor for alpha

I am looking to understand more how once you have a factor (or signal) how you would go about testing this for alpha, I assume you could see if it has low correlation with other factors but how would ...
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Factor Loading Precision/Details in Fama-French 3 Factors Model

I have a few questions regarding details about FF3F model. In the equation like following, $$ E(R_P)-r_f = \alpha +\beta_M[E(R_M)-r_f] + \beta_SSMB + \beta_V HML $$ Are SMB and HML factors are ...
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what is the right time period for estimating factor loadings in multi factor models?

Is there a generally recommended time frame (12 months, 24 months, 60 months) for estimating the factor loadings (betas) in a multi-factor model such as Fama French or Carhart or equivalent?
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are there any good papers on sector-specific versions of factor models?

Does anyone know of any good papers that build sector-specific (utilities, financials, energy, etc.) versions of factor models like the Fama French 3-factor or Carhart 4-factor models? For example, ...
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ML in Factor Models

I have recently learned about (implicit) factor models of the form: $$ R = Xf + \epsilon $$ where $R \in \mathbb{R}^{n}$ are security returns, $X \in \mathbb{R}^{n \times F}$ are factor loadings for ...
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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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