MBA 647– Investments – Fama-French 3 Factor Regression
Module 5 Project
This project is an individual assignment.
The objectives of this exercise:
- To perform multiple regression with real financial data.
- To estimate the Fama – French 3-factor model for a list of five stocks and interpret the regression output.
- To discern whether individual stocks are small, mid, or large-cap and value, neutral, or growth.
Students should be able to:
- Perform an Ordinary Least Squares regression to estimate the Fama – French 3-factor model.
- Perform proper inference with a correct interpretation of t-statistics.
- Discern whether a stock return significantly loads on one or more of the three factors.
- Tabulate regression results and discuss empirical findings.
- Use your four (4) stocks from your Think or Swim initial assignment (i.e., from the S&P 500 index). You must use the 4 stocks (or, more precisely, the ticker symbols). You will need 37-months of data on ticker prices ending with December 2020. The last month of return data should be December 2020. You must use end-of-month data!
- You must estimate the Fama and French 3-factor model. Thirty-six months of the three factors along with the risk-free rate in the decimal form will be provided in the accompanying Excel spreadsheet. Use these factors and the risk-free rate provided to you. The factors are MRP (BKM call this RM), SMB, and HML. Note, you need excess returns for your stocks. Estimating the Fama and French 3-factor model requires the use of regression software. Answer the following question:
- How, exactly, do Fama and French construct their SMB and HML factors?
- For each firm, perform a multiple regression to estimate the parameters in equation (10.11) of BKM 9th ed. Then complete a Table:
Note that t(Alpha) above means the t-statistic for the alpha estimate and that t(Beta-MRP) means the t-statistic for the beta coefficient estimated for the MRP factor, etc.
- Then, using the results from your multiple regressions, identify the “style” for each of your 10 firms. In your write-up, be sure to explain how you identified the various styles. Styles include Large-Neutral, Large-Value, Large-Growth, Mid-Neutral, Mid -Value, Mid-Growth, Small-Neutral, Small-Value, Small-Growth:
You must submit a brief write-up of your results. Your paper should be detailed enough so that someone else could pick up your paper and replicate your results. So, you will need a brief introduction describing your data sources, how you manipulated the data, how you calculated the Fama-French betas, 2 Tables, and a summary and discussion of your findings. In total, you must submit:
- Your write-up is to be in a Word file.
- An Excel spreadsheet (one sheet) containing the two Tables detailed above.
- Another Excel spreadsheet detailing how, exactly, you calculated the results in your Table (i.e., replicate the detailed findings for your stocks). Note that the Excel spreadsheets in points 2 and 3 should be in one file with two different labeled worksheet tabs. Alternatively, you may use 5 Excel sheets named with the ticker symbol if you wish to combine the date, ticker symbol, adjusted closing prices, and calculations and/or regressions separately for each of your 5 companies.
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