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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41
votes
3answers
29k views

How to build a factor model?

Factor models such as Fama-French or the other ones that are partially summarized here work on the cross-section of asset returns. How are the factors built, how are sensitivities/coefficients ...
19
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3answers
4k views

Why do expected return models and risk models use different factors?

This is a question responding to weekly topic challenge. I happen to see an interesting question from SYMMYS by Michael Kapler. I always approached expected return and risk modeling as separate ...
37
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2answers
10k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
8
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1answer
7k views

Interpreting the coefficients of Fama-MacBeth regression

According to Fama & MacBeth (1973) two-step regression, you start with estimating the beta factors. When applying the Fama-French 3-Factor model, you first run the linear regression $$r_{i,t}=α_i+...
9
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2answers
1k views

Distinction between "risk factor" and "market anomaly"

What are some of the general rules to decide whether a particular factor is a "risk factor" or "anomaly?" Naively speaking, can't you put any anomaly factor on the right-hand-side of the regression ...
5
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2answers
8k views

How to get real-time data for Fama-French model?

For Fama-French model we need SMB (small[market cap] minus big) and HML (high[book-to-market-ratio] minis low). I want to ...
4
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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 ...
4
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2answers
5k views

Fama French & Solving for Alpha

This is a question about comparing results from the Fama french 3 factor model. I have not physically done this, but let's assume a Fama French 3 factor regression was performed for Coca-Cola (KO) ...
2
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1answer
2k views

Exclusion of Utilites and Financials in Magic Formula

In Joel Greenblatt's magic formula, see https://en.wikipedia.org/wiki/Magic_formula_investing, why are utilities and financials excluded? What is the reasoning behind this?
1
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2answers
344 views

Stress testing fixed income Yield curve with Nelson Siegel

I am attempting to stress test the Zero coupon Yield curve using The Nelson Siegel model as described in the following papers : Generating Yield Curve Stress-Scenarios Representative Yield Curve ...
10
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1answer
3k views

What are the steps to perform properly a risk factor analysis on a portfolio?

I have been asked to perform a factor analysis on a given portfolio, assume it's a Swiss portfolio in CHF. First step, I chose which factors I would like to see in my analysis. The first factors I ...
14
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1answer
2k views

Optimization: Factor model versus asset-by-asset model

In portfolio management one often has to solve problems of the quadratic form $$ w^T \Sigma w + w^T c \rightarrow \min_{\omega} $$ with portfolio weights $w \in \mathbb{R}^N$ a constant $c \in \mathbb{...
9
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2answers
1k views

What are the main market anomalies/inefficiencies detected in quantitative finance?

I wondered about the existence of a complete list of the anomalies detected in quantitative finance. Generally, a market anomaly or inefficiency is a asset price and/or rate of return distortion on a ...
9
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3answers
9k 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. ...
7
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1answer
7k views

Rationale of Fama Macbeth procedure

I am confused about the rationale behind the Fama Macbeth regression methodology. I understand how to practically perform the two steps but not why one should do so. For instance, considering the ...
4
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3answers
34k views

How exactly do I calculate and interpret factors in Fama-French model?

Could anyone explain me how to interpret factors and what kind of regressions I should run? I have already calculated the factor returns as well as 6 Fama-French portfolio returns, the only problem ...
2
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1answer
2k views

Why were Fama/French Momentum Factors discontinued in 2016?

Is there a reason or some reference somewhere why the Fama/French Momentum Factors (WML) were discontinued at June 30, 2016, see e.g. here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/...
3
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1answer
532 views

Finance: Portfolio - Long Short Portfolio construction

I am trying to construct a Long / Short portfolio in R. Say I have two portfolios Tech and Mature and I want to go long on the <...
4
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2answers
477 views

Best practice for international Fama-French analysis

First I have to admit that I have never been really good at thinking about the implications of investments in different currencies. I don't know why but it makes my head spin, this is why I am no FX ...
2
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0answers
406 views

kalman filter for a multifactor model in R

I am trying to set up a time varying factor model for the purpose of return decomposition via kalman filter. Following this example and slightly modifying it so as to accommodate for more than one ...
3
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1answer
3k views

How to compute a Fama-Macbeth R-Squared (R2)?

I'm reaching out regarding the R-Squared of a Fama-Macbeth regression. This is often reported in econometric results but I have yet to find a good explanation of how it is computed. Specifically, if ...
2
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1answer
1k views

Rsquared in Fama Macbeth using rolling window

I am trying to do Fama Macbeth regression on some tradable factors using 5-year rolling window updated monthly. However, I am a little bit confused when calculating the final R-squared of the model. I ...
2
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1answer
1k views

Question about Fama Macbeth Regression (Confusion about paper)

I'm reading this paper Zura Kakushadze: 4-Factor Model for Overnight Returns https://arxiv.org/pdf/1410.5513.pdf and I am slightly confused about the methodology of the regressions. It says it uses ...
2
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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,...
9
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2answers
1k views

Interpreting Fama-French factors for the German stock market

I calculated the Fama-French five factors myself for the German market. Most of my results align well with prior research, except one thing: When i do the calculations for the sub-period from 2011 to ...
4
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1answer
926 views

Recommended Literature for creating Factor Mimicking Portfolios

Is there a textbook that contains the basics for creating Factor Mimicking Portfolios? Although there is a lot of peer-reviewed literature on this, I cannot find textbooks on Asset Pricing that ...
4
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1answer
222 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 ...
2
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1answer
592 views

How are Fama French Factor Returns for the last 3 and 12 months calculated?

In the Fama/French data library the monthly research factors for the Fama-French-3-Factor-Model and the Fama-French-5-Factor-Model are presented. I don't see how they are calculating the factor ...
2
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1answer
281 views

Are Fama French Factors market neutral?

I was wondering whether the famous fama-french factors such as e.g. SMB and HML are market neutral? I know that they are long-short factors in the sense that the net investment is essentially zero, ...
1
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1answer
154 views

Naive question: how do factor models inform portfolio construction?

I have read plenty on the topic of factor modelling, but, in the end, after one has decided upon the factors to include in a model, how do all the Betas how tell one how to weigh each asset in a ...