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8 votes
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 ...
phdstudent's user avatar
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3 votes
Accepted

Interpretation of SMB factor loading

Well this is actually a very simple question. Suppose of run a Fama-French 3-factor model regression on a portfolio $i$: $$ r_{i,t} - r_f = \alpha_i + \beta_{i,mkt} (r_{mkt} - r_f) + \beta_{i,HML}...
phdstudent's user avatar
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3 votes

What is the definition of aggregate volatility, and how to compute it?

As mentioned in the comments, the paper defines how they compute it: "to proxy innovations on aggregate volatility, (vt+1−γv,t), we use changes in the VIX index from the Chicago Board Options ...
AKdemy's user avatar
  • 9,024
2 votes

Why not use a time series regression when the factor is not a return?

Indeed if a factor is not a portfolio of traded assets you cannot apply time-series tests. It is no longer true that the null hypothesis implies $\alpha$ in the time-series regression is equal to zero....
phdstudent's user avatar
  • 8,421
2 votes

R resources for GMM estimation and testing of multifactor asset pricing models

In this answer, I provide Matlab code for implementing a two-step GMM test of a multi-factor asset pricing model. I closely follow Cochrane (2005) which is an amazig book. See also this short video. ...
Kevin's user avatar
  • 16k
2 votes

Analyzing portfolio returns using Fama-French Factors

It is very important to understand your end goal. FF regressions are used to understand return of portfolio which can be attributed to FF style factors. In this analysis I am assuming that you are ...
vaibhav's user avatar
  • 21
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

Return forecasting for portfolio optimization

I want to understand why factor models such as FF- 3-factor model are not used in practice for estimating the expected returns and covariance matrix (or different estimates given the inputs required ...
Richard Hardy's user avatar
2 votes

PCA factors not uncorrelated

If $X1$ and $X2$ are almost perfectly correlated (but variance of x1 is a million times variance of x2) so that the first (normalised) pca factor is (1/sqrt(2),1/sqrt(2)) and second is (1/sqrt(2),-1/...
Arshdeep's user avatar
  • 2,451
1 vote
Accepted

How to create a long-short portfolio on an academic basis

My current procedure is that I subtract the monthly portfolio return " top" from my monthly portfolio return "bottom". I then calculate my Sharpe ratio from these monthly returns ...
KaiSqDist's user avatar
  • 1,474
1 vote

The economic interpretation of stochastic discount factor (SDF) loadings

Hey I've run into this problem as well awhile back I was trying to webscrape data and make a synthetic dataset on a few thousand publicly listed companies. Questions were answered by a locally run LLM ...
Jonathan Bell's user avatar
1 vote
Accepted

Testing one asset pricing model against another a la Cochrane: a counterexample

I'll expand on the comments under the question. Suppose the following two-factor model holds $$ \mathbb E(R^{(i)}) = \beta_1^{(i)}\mathbb E(X_1) + \beta_2^{(i)}\mathbb E(X_2). \tag{iv} $$ That means ...
Kevin's user avatar
  • 16k
1 vote

Why not use a time series regression when the factor is not a return?

For simplicity consider the unconditional CAPM: $$\mathbb{E}[R^e_{t,i}]=\beta_i \mathbb{E}[R_{t,m}^{e}].$$ If you think of $\beta_i$ as a free parameter the equation has no meaning. You can always ...
fes's user avatar
  • 1,727
1 vote

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

Let us first do away with jargon and think of how to get the right betas naturally. You can either use data to estimate betas, or if you believe you know the betas specific to today's conditions (&...
Arshdeep's user avatar
  • 2,451

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