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16 votes
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Philosophical Question about Factor Models

This is actually a rather involved question, and different interpretations exist. A narrow, linear algebra based interpretation is that the stochastic discount factor lies in the linear span of the ...
Matthew Gunn's user avatar
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15 votes
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Rationale of Fama Macbeth procedure

Clarification on the regression coefficients Cochrane (Asset Pricing, rev. edition, 2005) states (p. 247): It it easier to do this in a more standard setup, with left-hand variable $y$ and right-hand ...
skoestlmeier's user avatar
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12 votes
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Fama-French factor model: why mimicking portfolios?

The innovation of Fama and French's Three Factor Model wasn't in finding book to market ratios forecast returns but in reconciling that empirical regularity with the standard framework of macro-...
Matthew Gunn's user avatar
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9 votes
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Portfolio Risk Decomposition - different methodologies

Different portfolio risk decompositions answer different questions. Before discussing what method to use, first ask why you want a decomposition and what definition of risk are you using. Is the ...
Matthew Gunn's user avatar
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8 votes
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Fama / French 3 Factor Data Not Giving Expected Results

That's perfectly normal. You are running a regression for a single stock. Single stocks have a lot of idiosyncratic risk (which is what the $R^2$ is capturing). I just run the fama-french regression ...
phdstudent's user avatar
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7 votes
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Interpreting the coefficients of Fama-MacBeth regression

No, you cannot interpret the average return for the factor as the risk premium. The second stage regression is equivalent to building a set of portfolios that have no net investment, a unit exposure ...
Tim Wilding's user avatar
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7 votes
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How would you in practice use factor models (like Fama French) to make decisions?

Not exactly. People use those type of models (such as the fama-french model) to evaluate their portfolio. Literally, you run a regression of a stock/portfolio agains the FF factor model to understand ...
phdstudent's user avatar
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7 votes
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What is the textbook answer to dealing with multicollinearity?

As one of the interviewers suggested, the expected answer starts with PCA and SVD. Before detailing it, let's take a paragraph about the way you seem to "misunderstand" the problem: ...
lehalle's user avatar
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6 votes
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Using cross-sectional factor model (BARRA type) returns in a time series factor model (Fama-French type)?

What you're describing sounds like the reverse of a Fama-Macbeth regression. The original Fama-Macbeth approach estimated rolling time series regressions to get CAPM betas and then doing a cross-...
John's user avatar
  • 5,411
6 votes

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

The clearest hands-on explanation I have seen so far is the following: Bernstein, W.: Rolling Your Own: Three-Factor Analysis Everything is explained very clearly and step-by-step with Excel. ...
vonjd's user avatar
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6 votes

How to use factor models for prediction?

You kinda mentioned in your questions, but the predictive model is essentially a lagged version of the "factor model". Part of the problem comes from the subscripts, the model itself doesn't really ...
Will Gu's user avatar
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6 votes
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Why were Fama/French Momentum Factors discontinued in 2016?

To preface, just a minor quibble: French still tracks the momentum anomaly elsewhere on his library, under "Sorts involving Prior Returns"; it's just no longer part of the core FF framework ...
David Addison's user avatar
6 votes
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Asset pricing model factor need to be excess return?

AP factors do not need to be excess returns. In case they are, corresponding prices of risk are conveniently equal to average factor values, since "factors price themselves": $$E[R_i] = \beta_{i} \...
Igor Pozdeev's user avatar
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
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6 votes
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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
  • 1,406
6 votes

characteristics of factor portfolios

Factor Portfolios are by-products of the cross-sectional regression techniques used to estimate style factor returns - the estimates of the return of a set of styles for a particular period. Style ...
Tim Wilding's user avatar
  • 1,406
5 votes

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

First of all, it is not conceivable to do all that work by hand! You are crazy to have just thought it! Second, if you want to repeat your work with different datasets, I suggest you to use R, since,...
simmy's user avatar
  • 585
5 votes

Fama/French momentum replication: risk-free rate missing on one of the legs?

Out of curiosity, I took a quick stab at replicating the Fama-French portfolios using CRSP data. I seem to be getting numbers reasonably close to Fama-French, so I think the issue is on your end. ...
Matthew Gunn's user avatar
  • 6,954
5 votes

pure factor return for factor model

From that picture you took, it looks like the $\beta_F$ is a time series. It's computed by doing a cross-sectional regression at each point in time.
lebelinoz's user avatar
  • 274
5 votes

Have any other factor "styles" which explain equity returns been uncovered?

A wonderful recent paper that might be of interest is Feng, Giglio, and Xiu's "Taming the Factor Zoo." First, the paper lists nearly 100 "factors" that have been proposed from 1965 through 2016. The ...
Helin's user avatar
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5 votes

Interpreting Fama-French factors for the German stock market

Preliminary This answer provides evidence (and confirms your supposition!) that the HML factor in Germany is no longer rewarded with higher returns in the cross-section of German stocks. From July ...
skoestlmeier's user avatar
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5 votes
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Interpretation of Fama French portfolio

This is a quite broad question, but as requested, i would like to provide you four recommendations. First, testing any portfolio sorting-strategy, it is common in academics to account for ...
skoestlmeier's user avatar
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5 votes
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How to do Fama French (1993) cross sectional regressions? A few questions

You say: At this point I don't really get any further, as I am unsure about which "cross section" is being talked about here. Since I have created 25 portfolios, I can only have all in all ...
phdstudent's user avatar
  • 8,381
5 votes

Covariance Matrix by Multi-Factor Model

Let there be $n$ assets and $k$ factors in the market. We assume multivariate normally distributed factor returns $$ r_f\sim \mathrm{N}\left(\mu_f,\Sigma_f\right) $$ with $k\times k$ factor covariance ...
Kermittfrog's user avatar
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4 votes

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

I think your best shot is to share with us your 3,000 stocks. How far can that be from FF sample? As a quick check I took the 25 book-to-market portfolios and the Fama-French 3 factor model and run ...
phdstudent's user avatar
  • 8,381
4 votes

Is there a way to meaningfully generate daily returns from monthly?

This is a commonly seen problem, and also relates to situations in which one is dealing with some less-liquid underlyings. I will describe a method that you could think of as "stochastic backfilling" ...
RiskyScientist's user avatar
4 votes

question about Quantopian alphalens

With the factor values in Alphalens, what is specifically done is demeaning followed by division by the sum of the absolute values of all the demeaned factors. With some offhand notation, this is more ...
Max Margenot's user avatar
4 votes
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How to calculate Fama-French factors?

I don't have time to give you a complete, precise answer, but this may help you get going. I'm pulling stuff from various notes I have in places. It's a bit trickier than someone naively might think. ...
Matthew Gunn's user avatar
  • 6,954
4 votes

Calculating fund alpha using Fama-French 3 factor model?

In the long run, you'd probably be better off learning a real programming language like Python, R, or MATLAB. While you can do this in Excel using mmult, ...
Matthew Gunn's user avatar
  • 6,954
4 votes
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Exclusion of Utilites and Financials in Magic Formula

Short answer: That is a common approach in empirical finance. The exclusion of financial firms is due to their business model, which is highly different from other companies. Fama/French (1992), p. ...
skoestlmeier's user avatar
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