Applied Financial Econometrics Testing the Fama French "Five Factor" Model - Economics Assignment Help

Assignment Task:

Task:

Testing the Fama French "Five Factor" Model

Your task is to examine the recent Fama French "five factor" model of security returns. The basic idea is that the excess return on an equity share (in excess of a risk-free rate) is linearly related to five factors. The first is a Market factor the return on a market index in excess of a risk-free rate (Mkt-RF) as in the Capital Asset Pricing Model. The second factor relates to the size of the company that issued the shares (SMB). The third factor relates to the extent to which the issuing company can be considered to be a growth or utility company (HML). The fourth factor relates to the profitability of the issuing 2 company (RMW). The fifth factor relates to the investment of the issuing company (CMA). We wish you to examine whether this model is appropriate for four different US equity shares based upon a sample of data which you will download.

Fama French Data

You will be asked to collect some of the data to be used as part of the assignment. However, part of the data required, the "Fama French Factors"1 , can be downloaded from Blackboard (file name FFData20.xlsx). The file contains over 20 years of observations at a monthly frequency; however, you will need to extract only a segment of the data in order to match your chosen sample period. You should match the data carefully as error at this stage will influence all of your results.

Yahoo Data

When collecting equity price data from Yahoo you should consider the following: 1) You will need to select monthly data. Note that the reference date for each month in the downloaded Yahoo data is the date of the opening price, the closing price will be from the last day in that month. For example, the February 2020 data will be labelled 01/02/2020. The opening price will be the opening price on Monday 3 February 2020 and the closing price will be the closing price on Friday 28 February 2020. 2) The "Adj Close" price is the closing price adjusted for dividends, stock splits etc. Use the Adj Close price in your research (rather than the Close).

Returns Data

You will need to use the Yahoo data to calculate Periodic Returns. Use the formula Return = 100 x (Price t - Price t-1 ) / Price t-1 Where: Price t is the month end price and Price t-1 is the month end price from the previous month.

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