# Tag Info

Accepted

### 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 ...
• 6,954
Accepted

### 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 ...
• 2,916
Accepted

### 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-...
• 6,954
Accepted

### 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 ...
• 6,954
Accepted

### 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 ...
• 8,381
Accepted

### 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 ...
• 1,406
Accepted

### 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 ...
• 8,381
Accepted

### 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: ...
• 12.2k
Accepted

### 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-...
• 5,411

### 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. ...
• 27.5k

### 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 ...
• 712
Accepted

### 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 ...
• 3,005
Accepted

• 6,663

### 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 ...
• 8,381

### 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" ...

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 ...
Accepted

### 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. ...
• 6,954

### 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, ...
• 6,954