Questions tagged [factor-models]
Econometric model that have the purpose to measure the effect of different risk measures on portfolio asset returns.
323
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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 ...
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1
answer
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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 ...
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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)=...
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77
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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 ...
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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, ...
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33
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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, ...
- 171
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1
answer
362
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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-...
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64
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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 ...
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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 ...
- 21
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60
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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 ...
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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 ...
- 101
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188
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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 $\...
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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 ...
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2
answers
436
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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, ...
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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 ...
- 2,726
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69
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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-...
- 281
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57
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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 ...
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1
answer
592
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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 ...
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votes
1
answer
185
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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 ...
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250
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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 ...
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1
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337
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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 ...
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840
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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 ...
- 281
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76
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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 ...
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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 ...
1
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0
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197
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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'...
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2
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389
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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 \...
3
votes
1
answer
106
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 ...
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Risk factor return data [duplicate]
I’m trying to create a risk model for equities, bonds and hedge funds.
Anyway I can access macro, style factor return?
I’ve tried Kenneth french data library for equities style factors but I still ...
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2
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1
answer
175
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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 ...
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1
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114
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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?
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1
answer
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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.
...
2
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0
answers
174
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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 ...
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1
answer
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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 ...
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1
answer
177
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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 ...
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75
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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 $K$ ...
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114
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Fama French Model; 5 Factors yield higher alpha than 3 Factors [closed]
I am currently running some Fama French regressions for a number of specified portfolios, consisting of US stocks (for a university level course). The regressions are conducted in R, using the lm ...
1
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0
answers
60
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How to interpret the results of Fama-MacBeth regressions? [closed]
I recently conducted a project for university, where I calculated the risk factors of the Fama-French 3Factor Model. For "SMB", the "size-premium", I get a negative result. What ...
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1
answer
277
views
2 methods for estimating factor return - differences between those 2 methods
I have a question for estimating factor return. I’ve found that there seems to be 2 methods for estimating factor return.
First, with return of an asset i(r_i) and factor loadings such as PER, EPS, ...
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1
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195
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Why cant I use PCA to find all stock factors? [closed]
Why cant I run all the stocks in the stock market thru a PCA model, and use the resulting principal components to create a factor model to price stocks and then buy stocks under priced and short ...
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0
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231
views
Interpretation of Chu-Stinchcombe-White CUSUM Test results
Context:
I am new to quant finance. I am doing some structural break analysis on a future price time series. I applied the Chu-Stinchcombe-White CUSUM Test from Chap 17 (Advances in Financial Machine ...
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1
answer
665
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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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0
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417
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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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0
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137
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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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57
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1
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1
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140
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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 ...
1
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0
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126
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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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40
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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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1
answer
586
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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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180
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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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1
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1
answer
363
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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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