Questions tagged [factor-models]

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

Filter by
Sorted by
Tagged with
3
votes
1answer
130 views

Three-factor model: Why not own company value/size

I have the following well-known formula for Fama and French's three-factor model $ R_{it}-R_{ft}=\alpha_i+\beta_{i1}(R_{m,t}-R_{f,t})+\beta_{i2}SMB_t+\beta_{i3}HML_t+\epsilon_{it}$. My question is: ...
1
vote
0answers
27 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 ...
0
votes
1answer
40 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 ...
1
vote
2answers
130 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)...
0
votes
1answer
80 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 ...
0
votes
1answer
470 views

Fama Macbeth regression with rolling window

I am confused about how to run fama macbeth regressions for portfolios with rolling window. For example if I have 25 portfolios and time period is 50 years(monthly), rolling window period is 5 years. ...
3
votes
0answers
103 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 ...
1
vote
1answer
70 views

Fundamental factor models: what to move to the LHS

My question is simple: what is the best practice in moving known variables to the LHS of Fundamental Factor Model regression? I am seeing different approaches. $R_{it}=\alpha_i + \beta_{i,1} f_{1,t}+ ...
0
votes
2answers
102 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 ...
1
vote
1answer
96 views

Highly skewed (and positive kurtosis) return distribution as a dependent variable

I have two set of optimized returns over a period of time and called this portfolio 1 and 2 and two benchmark portfolio (a value-weighted and equally-weighted benchmark). I want to see the difference ...
0
votes
1answer
123 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 ...
0
votes
0answers
42 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 ...
1
vote
0answers
55 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 ...
3
votes
1answer
103 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 ...
0
votes
0answers
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 ...
2
votes
0answers
44 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 ...
3
votes
1answer
96 views

Exposure/Factor Analysis on a loan portfolio?

I am working on performing factor analysis on a loan portfolio. This is my understanding so far, and I was hoping that some of the smart folks here might be able to chime and guide me through this ...
1
vote
1answer
55 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 ...
4
votes
2answers
1k views

Fama-French Factors in €

I am having a bit of a problem with currency conversion issues. What I do: I sort European stocks based on their book-to-market ratio, each year I form a portfolio (equal-weight) with the 10 stocks ...
0
votes
0answers
26 views

PCA on mixed types of returns

I'm looking for some resources on how to use the PCA technique in the case of mixed return types, i.e. lognormal (say for FX, equity indices) and normal (rates). The idea is to create a factor model ...
2
votes
1answer
95 views

APT - Pricing Factors that are not Statistical Factors

Arbitrage Pricing Theory makes the implication that statistical factors (i.e. those that explain covariances) imply pricing factors (i.e. those that explain returns). Is the reverse implication (i.e. ...
2
votes
1answer
3k views

Given a correlation martrix, calculate portfolio's correlation with its assets

Find correlation vector like $[ d e f ]$ where d, e and f represent correlation of P(portfolio) with its assets A, B and C respectively. The assets A, B, C can be another portfolio. In order for that,...
1
vote
1answer
76 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 ...
1
vote
1answer
67 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 ...
0
votes
2answers
79 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 ...
0
votes
0answers
36 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 ...
1
vote
0answers
119 views

Is there a good guide/mind map for factors of quantitative trading?

I have know there are many factors , they can divied into several groups in my opinion group 1 are some factors called P/E , ...
1
vote
0answers
27 views

What can one do with cross-sectional relationships?

This is somewhat of a broad question, but I think we all would like to find signals that predict something in the future. However, often times, we are just left with cross-sectional relationships (...
1
vote
0answers
36 views

Some questions to canonical correlations between principle components and asset pricing factors using R

I have done a asympotical principle component analysis (APCA), using eigen() in R, of the covariance matrix of a global dataset of excess returns. I took the ...
1
vote
1answer
94 views

How would you in practice use factor models (like Fama French) to make decisions?

So I understand that the Fama-French factor model relates a stock's excess return with its beta, market cap, and book to price. How does one use the model in practice? Do people assume that market ...
0
votes
0answers
43 views

Currency conversion on factors

I am a bit confused on this I have 3 factors Global credit (in excess of treasuries) hedged in USD Currency factor, essentially long a basket of currencies and short dollar = -DXY index Term factor ...
3
votes
1answer
178 views

How to do Fama French (1993) cross sectional regressions? A few questions

I am still relatively new to asset pricing factor models and have a few questions about my current empirical study. I would be very pleased if you could help me. I have created a new factor which I ...
1
vote
1answer
128 views

Fama MacBeth 2 step regression (2nd part)

I get the first part of the regression, basically it is a time series regression of returns on the proposed factors. So, I need to run the regression of monthly return on the monthly time series of ...
0
votes
0answers
35 views

Barra equity factor model handling equity index future

How is equity index future handled in Barra type of equity factor model, i.e. to get its market value exposure to various factors? Does one just treat it as a weighted combination of underlying single ...
17
votes
1answer
1k views

Testing Valuation, Size and Momentum (proprietary factors) from 1988-2013: No evidence of driving cross-sectional returns

I am currently testing whether three proprietary factors - Valuation, Size and Momentum - explain cross-sectional returns. A sample of 3000 securities was tested using Fama-MacBeth two-pass ...
2
votes
0answers
42 views

Constructing a replicating portfolio of a long-only strategy using long-short factors

Lets say I want to estimate a replicating portfolio by doing a linear regression between the returns of a long-only portfolio and several long-short factors like Fama-French 5-factor or Betting ...
0
votes
0answers
77 views

Univariate Portfolio Analysis

We want to form 10 portfolios based on the level of VAR (99%) for equity data over a 30 year period. Portfolio 1 is the portfolio of stocks with the lowest value-at-risk and Portfolio 10 is the ...
1
vote
1answer
45 views

FF 6-month lag of the accounting variables

I have a fairly short and straightforward question. I am running a dynamic optimization strategy and therefore need to construct the FF5 characteristics. I am using COMPUSTAT quarterly accounting data....
1
vote
2answers
98 views

Asset Pricing and inferences - Intercept and relationship to returns

Ideally this question is very similar to What's the meaning of the intercept in asset pricing model? I am regressing a "buys minus sells" portfolio returns to the Carhart factors. The intercept ...
0
votes
1answer
36 views

How do you build a model with uncertain time range?

Let's say you want to test the hypothesis that given a signal reaches some threshold, some asset will have some return over the next period. Here we have two unknowns. One, the value of your ...
2
votes
0answers
74 views

Fama Macbeth and Momentum factor

I am working on a Fama MacBeth regression with excess returns on the LHS and Size, Value an Momentum factors on the RHS. In literature, the Momentum factor is often definded as the cumulative past 6 ...
3
votes
0answers
44 views

Statistical significance of mean returns between two portfolios

Suppose I have developed two versions ($A$ and $B$) of a factor model for ranking stocks. Both versions of the model use the same scoring system: stocks are percentile ranked within a given universe ...
0
votes
2answers
1k 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 ...
0
votes
1answer
80 views

(Yearly) Hedge Fund alpha

I am currently trying to make the best of quarantine by getting familiar with Stata by working on a little project. As the title states, I want to compare yearly alphas of Hedge Fund strategies. I ...
0
votes
0answers
30 views

Transform Hierarchical Correlation structure to Standard Form

In the standard portfolio risk setup, we have $\sigma_{\Pi} = \sqrt{(w' B (VFV) B' w) + w'Dw}$ where $w$ is our weight vector for N assets $B$ is the Nxm factor beta matrix $V$ is the factor ...
6
votes
2answers
11k views

Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)

Recently, I am doing my dissertation that covers asset pricing theory. The empirical test of Fama 3 factors model is an important part of this dissertation. Please let me review the fama model. Fama ...
2
votes
0answers
240 views

Volatility Managed 6 Factor Model (Fama French) - Does it make sense?

after weeks of intense research and in spite of the current situation, I decided to ask the following question to some experts (you): I would like to develop/investigate a volatility managed six ...
0
votes
0answers
44 views

Question about equation (7) - Asset Allocation vs. Factor Allocation—Can We Build a Unified Method?

Question regarding the article Asset Allocation vs. Factor Allocation—Can We Build a Unified Method? by Jennifer Bender, Jerry Le Sun and Ric Thomas, The Journal of Portfolio Management Multi-Asset ...
3
votes
2answers
655 views

How does volatility skew change with underlying spot?

We know that generally ATM implied vol is negatively correlated with the underlying spot for equity indices, i.e. implied vol goes up when spot moves down. Therefore I wonder if there are any ...
8
votes
3answers
7k views

What's the meaning of the intercept in asset pricing model?

I would like to understand the role of alpha (intercept) in the regression-based asset pricing model or $n$-factor models; one of the most famous of those one is the Fama-French 3-factor model. ...

1
2 3 4 5