skoestlmeier
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Why use square root of companies market cap in the WLS matrix
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It depends on your (assumed) underlying data generation process. In general, Weighted Least Squares (WLS) can be used when your data is heteroscedastic but still uncorrelated. Assume a linear model ...

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What is NYSE breakpoint as used by Fama French?
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NYSE is the abbreviation for New York Stock Exchange Most financial researchers like Fama/French use the CRSP database for US financial data. It is maintained by the University of Chicago's Booth ...

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177 views
Error message when backtesting GARCH in R
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The error arises because the first element of rets is NA (which is expected behavior as ROC calculates the rate of change of a series, but a previous value prior to the first element is naturally not ...

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227 views
Standardized numerical values for ratings
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Mapping ordinal data to interval data is arbitrarily. The ranking of rating agencies is ordinal data, so only comparing operators > or < can be applied. The data can be sorted and as a central ...

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521 views
What is the benefit of High-minus-Low as in Fama French model?
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"High-minus-Low" refers to portfolio analysis, which is one of the most commonly used statistical methodologies in empirical asset pricing. There are several benefits of this technique in ...

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501 views
Fama French (2000): Characteristics, Covariances and Average Returns - intuition behind sorting of the returns
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Preliminary The approach in the paper of Davis/Fama/French (2000) is to give insight in four contrary explanations on the value-anomaly. Daniel/Titman (1997) trace the value-premium to the value-...

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42 views
Literature on return sensitivy in respect to: growth, risk and profitability
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There are several strands of literature on each of your variables of interest (growth, risk and profitability), but to my best knowledge, no one deals with all of them simultaneously (your research ...

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103 views
Calculating beta when holding market portfolio
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The phrase "The CAPM holds" refers to the assumption, that any asset return $r_i$ fulfills the pricing relation $r_i=r_f+\beta_i(r_m-r_f)$, where $r_m$ denotes the market return, $r_f$ the risk-free ...

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523 views
Rolling Winsorization for Time-Series
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Winsorization is fine, but carefully analyze your data and think about the nature of your outliers! I assume you are aware of this answer here: [...] So you have to be extremely careful and double ...

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84 views
In search of nice (approx) function forms of the volatility of cumulative simple returns
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Note: It is computationally simple to determine the volatility of any given return series, so in fact there may be no need for this approximation. Let's start with the annualized return $r_a$, which ...

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572 views
Fama Frech SMB factor and testing for size-effects on the market
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There are several issues to address your question, so let me first summarize some empirical facts on the SMB portfolio and then give you some hints for your analysis. SMB-return Using Stefano Marmi'...

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2k views
How to calculate monthly momentum strategies J6K6?
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Your steps are well written and correct in general, but it seems like there are some details to clarify, which may cause your results being slightly different from previous studies. Why I am taking ...

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700 views
Transform Fama French Returns to Euro
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I would recommend you to convert your global portfolio returns into US-$ Kenneth French provides several global factor-returns for the entire global stock market of developed countries. The ...

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815 views
Are Kenneth French Research Returns log-Returns?
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No, none of the returns on Kenneth French's data library are log-returns. Any of the Fama/French research factors (i.e. SML, HML, etc.) is calculated as the mean of value-weighted portfolio returns. ...

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102 views
Covariance and Beta: can anyone explain this calculation?
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If $X$, $Y$, and $Z$ are real-valued random variables and $a$, $b$, $c$, $d$ are constant (i.e. non-random), then the following fact is a consequence of the definition of the covariance: $$cov\left(X, ...

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How does Kenneth French create the industry portfolio returns?
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The constitution of each industry portfolio is described in each "detail"-section on Kenneth French´s homepage. The industries are defined by sorting each NYSE, AMEX, and NASDAQ stock based ...

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69 views
Strategy to write uncovered put and call
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The strategy you are asking for is called straddle. To be more precise, as you would like to sell one put and one call option, it is a short straddle. Both options are referring to the same underlying ...

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634 views
How to have an unbiased estimation of the standard deviation when using rolling returns?
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Your estimator $\hat{s_i}$ for stock $i$ is an unbiased estimator of its latent standard deviation $\sigma_i$ (which is constant for your model). When applying your "window rolling" for ...

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450 views
Are the Fama-French factor portfolios calculated based on absolute or relative value`?
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The Fama/French (1993) paper is based on the widely used CRSP database, maintained by the University of Chicago's Booth School of Business. It provides data for NYSE-, AMEX-, and NASDAQ-listed ...

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4k views
Testing the statistical significance of alphas in the CAPM
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A time-series regression with properly time indices for testing the CAPM would be $$ R_{i,t}-R_{t}^f = a_i + \beta_i(R_{t}^m-R_{t}^f)+\epsilon_{i,t} $$ You may look at this answer for a deeper ...

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390 views
Weighting stocks by market capitalization in a cross-sectional weighted regression
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Let $\text{SSR}$ denote the sum of squared residuals and $\text{WSSR}$ the weighted $\text{SSR}$. Standard OLS-regression approach minimizes the $\text{SSR}$ with $y$ as the dependent and $y$ as the ...

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105 views
Test statistic of event study
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If I understand it rightly, I have to take the mean of the abnormal returns for the 50 companes at $t_0$ as the numerator. for example: $\bar A_{t} \ = \ \frac{1}{N_t}\sum_{i=1}^{n_t}A_{i,t'} $ ...

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145 views
Understanding Fama Macbeth Regressions of Returns
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First, you are right that monthly return data is used. Table 1 concludes, that a one unit increase of gross profitability accounts for an additional 0.75% stock return per month after controlling for ...

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250 views
Minimum degree of freedom required for Fama french three factor model
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Idiosyncratic volatility is measured as the residual standrad error from a time-series regression of periodic excess stock returns on the returns of factor-mimicking portfolios. Preliminary Using the ...

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241 views
What methods of Data-Screening are necessary before starting an analysis with Thomson Reuters Datastream?
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Preliminary Thomson Reuters Datastream is one of the most commonly used and widely accepted data-source for non-US data in empirical finance. Working with financial data is based on many filters ...

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678 views
How to compute cumulative performance of a portfolio with two equities?
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Preliminary calculations Consider a $n \times 1$ vector of asset returns $r_{it}$ for each time $t$, where each of it is calculated as $$r_{it} = \frac{P_{it} - P_{it-1}}{P_{it-1}}$$ i.e. simple ...

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457 views
Why is there inconsistency in WACC vs unlevered return?
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There may be two points you are missing: You are allowed to apply the CAPM to calculate the cost of equity $R_e$. However, one of the CAPM assumptions is, that taxes are not taken into account into ...

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69 views
Looking for a paper related to tail risk of hedge funds and its decomposition
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I recommend you to read a quite current paper in the Journal of Financial Economics which mainly covers the analysis of tail risks (and references to papers which focus on its decomposition): Agarwal/...

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82 views
Gordon's dividend valuation model: Ignoring optionality
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If you assume the Gordon-Model to be the correct approach for evaluating a certain company, then $P_{Call_{American}}(S_T>P_t)$ equals zero. The stock price at time $t$ is $$P_t=\sum_{n=t+1}^{\...

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402 views
if the​ risk-free interest rate​ increases, and nothing else changes, is the market portfolio still efficient?
1 votes

Assuming the CAPM*, the expected return $r_i$ of stock $i$ equals $$E[r_i] = r_f + \beta(r_m - r_f)$$ with $r_f$ as the risk-less rate of interest and $r_m$ as the return of the market portfolio. The ...

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