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# Tag Info

## Hot answers tagged regression

22 votes
Accepted

### Why and when we should use the log variable?

Based on your paper and variables, I assume you ask about the use in econometric models. There are some rules of thumb for taking logs (do not take them for granted). See for example Wooldrigde: ...
• 9,014
14 votes
Accepted

### Calculating alpha and its meaning

Alphas from a time-series regression are error terms in the cross-sectional, linear relationship between expected returns and factor betas. If a factor model were correct those error terms (the alphas)...
• 6,964
13 votes

### Choosing the right statistical test for Mutual Fund Performance Evaluation

Define excess return $r^x_{it} = r_{it} - r^f_{t}$ as the return $i$ minus the risk free rate, and $f_{jt}$ similarly denotes the excess return of factor $j$ at time $t$. Let's say we have some factor ...
• 6,964
12 votes

### Fama Mac-Beth (1973) vs Fixed effect

A more apples to apples comparison would be between (i) Fama-Macbeth procedure and (2) clustering standard-errors by date. Adding fixed-effects is somewhat different. Problem: cross-sectional ...
• 6,964
9 votes

### Definitions of Beta

I slightly disagree with Alex’s comment. The CAPM does not read as \begin{align*} r_{i,t} = r_{f,t}+ \beta_{i} (r_{m,t}-r_{f,t}) + \varepsilon_{i,t}. \end{align*} There is an important difference ...
• 16k
8 votes
Accepted

### What drives the idiosyncratic volatility puzzle?

Preliminary The empirical finding of a strong negative cross-sectional relation between idiosyncratic volatility and future stock returns is highly inconsistent with the predictions of all theoretical ...
• 2,916
8 votes
Accepted

### CAPM model as a regression

If you really believed the CAPM's prediction that $\alpha=0$, then imposing $\alpha=0$ in your estimation would indeed lead to your 2nd formula. The problems? The CAPM doesn't work so imposing a ...
• 6,964
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 ...
• 8,401
7 votes
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
7 votes
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
6 votes
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-...
• 5,421
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. ...
• 27.5k
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 ...
• 712
6 votes
Accepted

• 8,401
4 votes

### Is it safe to assume inflation rate and treasury yields are stationary?

Answering your main question: Is it a huge problem if I start running correlations on the original values? Short answer: Yes. Both the raw/untransformed CPI and treasury yields are widely known non-...
• 4,386
4 votes
Accepted

### Cross Sectional vs. Time-Series Risk Premia Estimate

No one is better at explaining asset pricing than John Cochrane. He explains it in detail in his brilliant textbook. The following videos from his video course are pure gold 2.2 Time-Series and GRS 2....
• 16k
4 votes
Accepted

### How does one show that the Sharpe Ratio is closely related to the t-statistic of the mean differential return?

It makes sense. Intuitively, I consider the Sharpe ratio as a proxy for win-rate. Let's assume normal returns. The Z score is defined as: $$\frac{x - \mu}{\sigma}$$ The T-stat for zero-mean is ...
• 804
3 votes
Accepted

### Fama French & Solving for Alpha

It's fine to put any excess return on the left hand side of the regression. Definition of excess return The difference between two returns is called an excess return. An excess return is the result ...
• 6,964
3 votes
Accepted

### Is Least Median Squares (LMS) regression commonly used in Finance?

Interesting idea. I'm guessing this isn't used for two reasons: First, the only algorithm I could find is $O(n^3)$, which is horrible if you're using a moderately-sized high-frequency dataset. ...
• 811

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