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
  • 8,306
3 votes

Fama French Factor adjusted returns

Yes. In a nutshell, the alpha of that regression will tell you how much of the portfolio expected return is not explained by the Fama-French 3-factor model and the $R^2$ of the regression will tell ...
phdstudent's user avatar
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3 votes
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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
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Is sorting stocks into portfolio mandatory in Fama-French model?

When you only have three stocks in your data set, trying to form portfolios will not be helpful. Run the analysis on the individual stocks' data as is. Using portfolios instead of individual assets in ...
Richard Hardy's user avatar
2 votes
Accepted

Should I use common equity or total equity for book value? (when replicating Lewellen's 2015 paper on a cross section of expected stock returns)

Even though he does not state it explicitly, it is likely that he used the value of common equity as the book value of equity. On page 12, Lewellen states "some studies follow Fama and French (...
Julien Maas's user avatar
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

Fama-French Long-Short portfolios. Is short really necessary?

The standard methodology for a single "variable" (such as price-to-book) is this: 1. Sort the stocks in the cross-section at a specific point in time by that variable. 2. Compare the ...
Enrico Schumann's user avatar
2 votes
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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
1 vote
Accepted

FM regressions for size groups when examining a cross section of expected stock returns

As can be seen in the graphs and tables in Lewellen's paper, the cross sectional out of sample slopes differ for each size group, for each date, and should thus be obtained using only the stocks in ...
Julien Maas's user avatar
1 vote

Fama-French Regression Output Interpretation (Intercept/Alpha)

If the model holds, $\alpha_1=\dots=\alpha_N=0$ for all the test assets $i=1,\dots,N$. (In your case $N=3$.) Conversely, if $\alpha_i\neq 0$ for at least one asset $i$, the model does not hold. Now, ...
Richard Hardy's user avatar
1 vote
Accepted

Nominal vs. real (inflation-adjusted) prices/returns in cross-sectional asset pricing

You can use nominal or real returns in the CAPM or Fama-French model. Both models have expressions for excess returns. As inflation will adjust nominal returns in the same way for different assets in ...
Andre's user avatar
  • 132
1 vote

Fama-French 3Factor Model alpha

It is perfectly possible to get zero alpha (specially if you are looking at returns of mutual funds/ETFs). With individual stocks you are likely not to get zero alpha. If you edit your question to ...
phdstudent's user avatar
  • 8,306
1 vote

How to perform Shanken (1992) correction for errors-in-variables issue?

Question 1 If there are $k=1$ factors (i.e. a single factor): $\beta$ is a vector (a single-column matrix), $(\beta^{'}\beta)^{-1}\beta^{'}\Sigma\beta(\beta^{'}\beta)^{-1}$ is a scalar, $\lambda^{'}\...
Richard Hardy's user avatar

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