6 votes
Accepted

Are Fama French Factors market neutral?

The factors are not constructed to be market neutral. The factors are constructed from 6 subportfolios sorted by book-to-market and size. You can read more about how the factors are constructed at ...
Tim Wilding's user avatar
  • 1,396
6 votes
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Comparing Investment Style with Fama French 3 Factor Model

How do the investment styles compare? KIS 10 is the only one with substantial exposure to Value and Size, the other two have negligible exposure to these two factors. GS1 is typical of a portfolio of ...
Alex C's user avatar
  • 9,372
3 votes
Accepted

PCA and K-means clustering on returns

A classic problem, been there, done that, didn't buy the T-shirt ;-) PCA and clustering (K-means, or hierarchical) are similar but different. They're both "unsupervised learning" methods; ...
demully's user avatar
  • 5,071
3 votes
Accepted

Low volatility in factor regression

The CAPM claims that only systematic risk matters (i.e. covariation with the market) to determine an asset's expected return. So the fact that low volatility stocks have returns that are not ...
Kevin's user avatar
  • 15.7k
3 votes

Why is Weighted Least Squares necessary in fundamental factor model?

There are two main reasons for using weights when estimating factor returns with cross-sectional regressions: a. The 'technical argument': To fix for heteroskedasticity as cross-sectional returns of ...
Alexandre Oliveira's user avatar
3 votes

Comparing Investment Style with Fama French 3 Factor Model

This question seems rather vague, but I believe what the question can be answered by identifying the portfolio with the largest difference in the portfolio's excess return and the FF3FM expected ...
Jason p's user avatar
  • 91
3 votes

Why do Factor Models set up their factors differently from regression?

Thanks for editing your original post to show that betas are in front of the factors. In factor models, $\beta$ are factor loadings (regression coefficients) while $X$ are factor exposures (...
develarist's user avatar
  • 3,000
3 votes

How do I control for a firm's “factor loadings” based on the Fama French model in a regression model?

It sounds like something reasonable/standard to do would be. Sort your companies into five portfolios based upon quintiles of social responsibility. Also make a long-short portfolio of the top ...
Matthew Gunn's user avatar
  • 6,934
2 votes

How can I calculate Fama-French Beta, RMW and CMA factor for a particular stock?

Use monthly returns and follow Ken French's website. RMW, CMA, and MOM are all calculated in depth on a near daily basis. From his Dartmouth data library. MRP Rm-Rf, the excess return on the ...
zglin's user avatar
  • 238
2 votes

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

A simple addendum, that doesn't seek to supplant either the learned question and answer above. The short answer is the initial distinction drawn between ex-ante and ex-post is critical. What do you ...
demully's user avatar
  • 5,071
2 votes
Accepted

Why cannot Fama-MacBeth regression identify a zero-mean factor with explanatory power?

Suppose all of the returns are excess returns. (Otherwise, make them.) You are testing $\text{H}_{0}\colon\ \gamma_1=0$ in $r_i^*=\gamma_0+\gamma_1 \beta_i+u_i$. Since the factor perfectly explains ...
Richard Hardy's user avatar
2 votes
Accepted

Factor loadings in Nelson-Siegel model

Yes, in general these factor loadings have the same interpretation as in factor analysis, there are slight difference though. In both cases, factor loadings indicate the contribution of underlying ...
Hans-Peter Schrei's user avatar
1 vote

factor evaluating methodology with factor return and factor exposure

The r = Bf+s is the general formula that explains how each ticker is affected by a specific factor. It will not hold for entire portfolios, in that case you have to ...
P. Pinho's user avatar
  • 111
1 vote

structural model - exposure estimation

The proposal in the book reduces the degrees of freedom of the problem by one versus your proposal. Seeing as you are only interested in the the relative exposure allocation, it makes sense to reduce ...
Trevor Hansen's user avatar
1 vote
Accepted

PCA on returns gives negative loadings on market short

Yes, you can flip the negatives, that cancel out each other side. All of your stocks are negatively correlated to inverse beta, which is the same as saying that stocks tend to be positively correlated ...
demully's user avatar
  • 5,071
1 vote
Accepted

How to Cross-Validate whether fund returns are due to static factor exposures?

Both of the references below talk about specifically the problem you are looking at and discuss methodologies that might of interest. There has been a lot of work done on replicating hedge fund ...
Swagato Acharjee's user avatar
1 vote
Accepted

Help understanding factor modeling, solving for residuals

You see $(Y,X)$, you want a relation ship between $X$ and $Y$. You will assume Linear regression I.e you assume it exists $\beta$ such that $Y=X\beta + \epsilon$ and you want to find $\beta$. ...
M. Jeunesse's user avatar
  • 2,422
1 vote

How to interpret the French-Fama SMB factor?

There could be a number of reasons, let go over this. First, your sample (the 10 portfolios) might differ from the sample FF used to compute the SMB factor. May be you're using a smaller market or ...
Tim 's user avatar
  • 337

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