Thank you so much. you helped me a lot. your video is much better than others. you used real data and practiced in front of ours which gives us a better understanding. Beautiful !
According to the textbook the 5,5% market risk premium is not based on 1980-2006 but is actually based on 1900-2007, which is a historical equity risk premium relative to bills and calculated as a geometrical mean. However, a very nice video indeed!
I believe the coefficient beta's used for the APT are to be multiplied by the actual values, when using the APT equation: Ri = Bi(Hml) * HML + Bi(Smb) * SMB etc.
When building the Fama-French 3 Factor Model, all three factors (market risk premium, size premium, and value premium) are included regardless of whether some of them have non-significant coefficients. This is because even if the coefficients for some factors are not statistically significant, they may still contribute to explaining a portion of the variation in stock returns. It is important to note that statistical significance does not necessarily imply economic significance. Factors with non-significant coefficients may still play a meaningful role in explaining stock returns, and excluding them from the model could lead to a loss of explanatory power and a less accurate estimation of expected returns. Furthermore, the coefficients of the factors in the Fama-French 3 Factor Model may change over time as market conditions and economic factors change. While some coefficients may be non-significant in one period, they may become significant in another period. Therefore, it is important to continue to include all three factors in the model to account for any potential changes in the relationships between the factors and stock returns over time. In summary, while some coefficients in the Fama-French 3 Factor Model may be non-significant, all three factors should be included in the model as they may still contribute to explaining stock returns and provide a more accurate estimation of expected returns.
Since size, value factors and the intercept are not statistically significant, should we use them estimating the expected return or neglect them (take them as 0)?? Also how do we test to see if the expected is statistically significant?
Hi Shane. Thanks for the video. I got a question about calculating the required rate of return. If you have insignificant coefficients for SMB and HML, which means they are statistically equal to zero, why do you use them in calculation of the required rate of return? Is it correct or you just wanted to stick to the formula?
Excellent video, thank you very much! I still have some doubts with the construction of the model factors. What is the criteria to categorize firms as small or large (in order to build the SMB factor)? Also, what is the B/E and M/E criteria to construct the HML factor?
Hello Sir Just went through your video and found it very useful. Sir can you also show the same regression exercise on Farma-French model using cross-sectional analysis ?
When building the Fama-French 3 Factor Model, all three factors (market risk premium, size premium, and value premium) are included regardless of whether some of them have non-significant coefficients. This is because even if the coefficients for some factors are not statistically significant, they may still contribute to explaining a portion of the variation in stock returns. It is important to note that statistical significance does not necessarily imply economic significance. Factors with non-significant coefficients may still play a meaningful role in explaining stock returns, and excluding them from the model could lead to a loss of explanatory power and a less accurate estimation of expected returns. Furthermore, the coefficients of the factors in the Fama-French 3 Factor Model may change over time as market conditions and economic factors change. While some coefficients may be non-significant in one period, they may become significant in another period. Therefore, it is important to continue to include all three factors in the model to account for any potential changes in the relationships between the factors and stock returns over time. In summary, while some coefficients in the Fama-French 3 Factor Model may be non-significant, all three factors should be included in the model as they may still contribute to explaining stock returns and provide a more accurate estimation of expected returns.
Hi Shane Van Dalsem I'm writing my master thesis and I have to use the F&F 3 factor model. I did the same thing you did, but how can I get the premiums (Rm-Rf premium, SMB-premium, HML-Premium). Can you help me please?
+Manuel Fuentes +Thomas Haefli i'm wondering how can we calculate the premiums ourselves. i'm also writing up my master thesis paper based on stock exchange of Thailand data. Thank you in advance
Hi, thank you for the tutorial. Would you be so kind as to send us the link for market, size and value risk premiums? I was able to get the book "Equity asset valuation, 2nd edition" but I was not able to find the values you've used in this tutorial. Could you help? Thanks again.
Hello, do you have a source for the time frame you mentioned in the Kenneth French data set? I can't find anything that states that for example the data for October 2012 is from September 1st through October 1st. Thank you in advance!
Hi, Mixdery. When I made this video I tried the model using October 1st through October 31st for the October data (for example) and there were no statistically significant relationships. I've used the Kenneth French data several times for this type of model and have always found that to be the case.
Yes, I agree with you. I also just found a little explanation on his website, where he states that the dates are from the beginning of the month. (mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_factors.html) Quote: "[...]that have a CRSP share code of 10 or 11 at the beginning of month t, good shares and price data at the beginning of t, and good return data for t minus the one-month Treasury bill rate (from Ibbotson Associates)." This goes along well with you explanation. It also makes sense, because you get the monthly new T-Bill rate at the beginning of a month for the proceeding month. Again: Thank you very much for your video!
There are different ways to calculate the Market Risk Premium. I typically use the Equity Risk Premium that is calculated by Aswath Damodaran. It's available at pages.stern.nyu.edu/~adamodar/. Another method is to calculate the difference between the return on a market index and the risk free rate each month over a predetermined number of years and then find the geometric average of the differences.
thx for this nice video, but how to find the market risk premium for canadian socities like td bank or rbc bank and also the size risk premuim & the value risk premium
What if the Excess Return has a non normal distribution? th-cam.com/video/HFTOX6a4FAQ/w-d-xo.html Does it affect the Regression? I'm using the tow step test of Fama & Macbeth and I'm not sure to continue.
Hello everyone, I get a lot of questions about this video. One common question that I get is "what research premiums should I use?" Ideally, you would use the expected risk premiums (a forward-looking number). If you can figure out what that should be, you are smarter than I am and probably shouldn't be watching this video :). From Kenneth French's website, you can download the historic risk premiums. I've downloaded and calculated the average annual risk premiums for the following three time periods. Risk Premiums Years Mkt-RF SMB HML 1927-2015 8.30% 3.32% 4.83% 1965-2015 6.38% 3.56% 4.46% 1980-2015 8.22% 1.34% 3.87%
@@89Bostonian hey, do you have any work about cross-sectional regression to calculate premiums? can you share it with me, please? I couldn't find any tutorials online. ideally using eviews or just excel.
Fama, E. F. and French, K. R. (2012) ‘Size, Value, and Momentum in International Stock Returns’, Journal ofFinancial Economics, Vol. 105, No. 3, pp. 457-472, Available at: www.sciencedirect.com/science/article/pii/S0304405X12000931 (Accessed: 11 February 2019).
Where is the Nobel Prize nomination for Fama-French? The added size and value risk premium beta alone alert CAPM instructors to the need for expanded market tools in order to just begin measuring price valuations. The betas seem sensitive to Behavioral Theory ... Isaac Newton would be proud to have had this info.
People looking for (Rm-Rf premium, SMB-premium, HML-Premium) I would recommend you guys go here hope it helps. mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
I'm thinking my prof wants me to download the multi betas (such as B/V and SML and HML etc. to create the excel regression) but I guess it has to be daily like my returns were, but I downloaded the returns daily info from yahoo finance. How would I get the other data for multi-factor for my specific stocks? like 5 years of daily history? Do you know? I'm supposed to use the regression add-in in excel. Thank you.
This is the best Fama-French model tutorial among all videos and articles I've found. Thank you so much!
gained a subscriber, the only person on youtube to be able to explain this to me. lots of thanks !! :)
Amazing video! Appreciate your efforts in explaining tiny details rather than assuming that readers should know that like Yahoo finance bit. Cheers!
Very good tutorial. I really liked that you showed the resources used to find your data. Thanks!
Brilliant explanation of the model, subscribed.
you are a lifesaver... was struggling with my dissertation until this!
Thank you so much. you helped me a lot. your video is much better than others. you used real data and practiced in front of ours which gives us a better understanding. Beautiful !
Thanks for this excellent video! You are a lifesaver!
According to the textbook the 5,5% market risk premium is not based on 1980-2006 but is actually based on 1900-2007, which is a historical equity risk premium relative to bills and calculated as a geometrical mean. However, a very nice video indeed!
why do you use all 3 factors despite some of them having non-significant coefficients?
I believe the coefficient beta's used for the APT are to be multiplied by the actual values, when using the APT equation: Ri = Bi(Hml) * HML + Bi(Smb) * SMB etc.
When building the Fama-French 3 Factor Model, all three factors (market risk premium, size premium, and value premium) are included regardless of whether some of them have non-significant coefficients. This is because even if the coefficients for some factors are not statistically significant, they may still contribute to explaining a portion of the variation in stock returns.
It is important to note that statistical significance does not necessarily imply economic significance. Factors with non-significant coefficients may still play a meaningful role in explaining stock returns, and excluding them from the model could lead to a loss of explanatory power and a less accurate estimation of expected returns.
Furthermore, the coefficients of the factors in the Fama-French 3 Factor Model may change over time as market conditions and economic factors change. While some coefficients may be non-significant in one period, they may become significant in another period. Therefore, it is important to continue to include all three factors in the model to account for any potential changes in the relationships between the factors and stock returns over time.
In summary, while some coefficients in the Fama-French 3 Factor Model may be non-significant, all three factors should be included in the model as they may still contribute to explaining stock returns and provide a more accurate estimation of expected returns.
Since size, value factors and the intercept are not statistically significant, should we use them estimating the expected return or neglect them (take them as 0)?? Also how do we test to see if the expected is statistically significant?
Hi Shane, Thanks for the video and is it possible to get the link for the values for Market risk-free, size and value?
After regression, how can I get values related to the market risk premium, size premium and value premium?
Very well explained! You Sir could be a great teacher :)
Hi Shane. Thanks for the video. I got a question about calculating the required rate of return. If you have insignificant coefficients for SMB and HML, which means they are statistically equal to zero, why do you use them in calculation of the required rate of return? Is it correct or you just wanted to stick to the formula?
How do we interpret the results? Is that the expected return for the next year?
Thanks SO much Dr. Van Dalsem
How would you go about building an optimal portfolio with FAMA French?
how can we calculate alpha without using a regression, please?
The alpha is the intercept from the regression so you have to use a regression to calculate it.
How come you didn't include the intercept (alpha)?
alpha = 0
Does it matter to include after hours? I used (adj. closing-open)/open, maybe with one day but I'm using 5 years of data.
I wouldn't think that it would make a significant difference. It depends on what you are using it for.
Hello Sir, in what format is the data from Kenneth French's website? Is it basis points or percentages?
Excellent video, thank you very much! I still have some doubts with the construction of the model factors. What is the criteria to categorize firms as small or large (in order to build the SMB factor)? Also, what is the B/E and M/E criteria to construct the HML factor?
Hello Sir
Just went through your video and found it very useful. Sir can you also show the same regression exercise on Farma-French model using cross-sectional analysis ?
This is very helpful. Thank you very much !
The statistic result of SMB and HML is not significant, but why we still use them to evaluate a stock?
When building the Fama-French 3 Factor Model, all three factors (market risk premium, size premium, and value premium) are included regardless of whether some of them have non-significant coefficients. This is because even if the coefficients for some factors are not statistically significant, they may still contribute to explaining a portion of the variation in stock returns.
It is important to note that statistical significance does not necessarily imply economic significance. Factors with non-significant coefficients may still play a meaningful role in explaining stock returns, and excluding them from the model could lead to a loss of explanatory power and a less accurate estimation of expected returns.
Furthermore, the coefficients of the factors in the Fama-French 3 Factor Model may change over time as market conditions and economic factors change. While some coefficients may be non-significant in one period, they may become significant in another period. Therefore, it is important to continue to include all three factors in the model to account for any potential changes in the relationships between the factors and stock returns over time.
In summary, while some coefficients in the Fama-French 3 Factor Model may be non-significant, all three factors should be included in the model as they may still contribute to explaining stock returns and provide a more accurate estimation of expected returns.
Hi Shane Van Dalsem
I'm writing my master thesis and I have to use the F&F 3 factor model. I did the same thing you did, but how can I get the premiums (Rm-Rf premium, SMB-premium, HML-Premium). Can you help me please?
Thomas Haefli
This is where I got mine
hope this helps.
mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
+Manuel Fuentes +Thomas Haefli i'm wondering how can we calculate the premiums ourselves. i'm also writing up my master thesis paper based on stock exchange of Thailand data. Thank you in advance
Hi, thank you for the tutorial. Would you be so kind as to send us the link for market, size and value risk premiums? I was able to get the book "Equity asset valuation, 2nd edition" but I was not able to find the values you've used in this tutorial. Could you help? Thanks again.
Can you please tell me the authors' name or can you share the link of the book?
Thank you for this tutorial!!! Really helpful!
Hello,
do you have a source for the time frame you mentioned in the Kenneth French data set? I can't find anything that states that for example the data for October 2012 is from September 1st through October 1st.
Thank you in advance!
Hi, Mixdery. When I made this video I tried the model using October 1st through October 31st for the October data (for example) and there were no statistically significant relationships. I've used the Kenneth French data several times for this type of model and have always found that to be the case.
Yes, I agree with you. I also just found a little explanation on his website, where he states that the dates are from the beginning of the month. (mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_factors.html) Quote: "[...]that have a CRSP share code of 10 or 11 at the beginning of month t, good shares and price data at the beginning of t, and good return data for t minus the one-month Treasury bill rate (from Ibbotson Associates)." This goes along well with you explanation. It also makes sense, because you get the monthly new T-Bill rate at the beginning of a month for the proceeding month.
Again: Thank you very much for your video!
Thanks dude! You have saved my project! :)
Wow man thanks !! missed my lab, you're my hero
you sir can explain stuff, thanks for doing this. subscribed.
Thank you, Sir.
This may sound like a stupid question but what do the coefficients actually mean? Are they the betas? Thankd
How can I calculate the Market Risk Premium 0.055?
Thank you.
There are different ways to calculate the Market Risk Premium. I typically use the Equity Risk Premium that is calculated by Aswath Damodaran. It's available at pages.stern.nyu.edu/~adamodar/. Another method is to calculate the difference between the return on a market index and the risk free rate each month over a predetermined number of years and then find the geometric average of the differences.
Thank you ! for making it easy :)
thx for this nice video, but how to find the market risk premium for canadian socities like td bank or rbc bank and also the size risk premuim & the value risk premium
When calculating the Required Rate of Return for Ford, you did not use the intercept that the regression model generated, why did you not use it?
The intercept is the Rf rate, it is the av. rate you would expect to get when your stock had 0 exposure to any of the risk factors..
Thank you.
What if the Excess Return has a non normal distribution? th-cam.com/video/HFTOX6a4FAQ/w-d-xo.html
Does it affect the Regression? I'm using the tow step test of Fama & Macbeth and I'm not sure to continue.
Hello everyone,
I get a lot of questions about this video. One common question that I get is "what research premiums should I use?" Ideally, you would use the expected risk premiums (a forward-looking number). If you can figure out what that should be, you are smarter than I am and probably shouldn't be watching this video :). From Kenneth French's website, you can download the historic risk premiums. I've downloaded and calculated the average annual risk premiums for the following three time periods.
Risk Premiums
Years Mkt-RF SMB HML
1927-2015 8.30% 3.32% 4.83%
1965-2015 6.38% 3.56% 4.46%
1980-2015 8.22% 1.34% 3.87%
you can run cross-sectional regression with beta and mean return to calculate risk premiums for all factors.
@@89Bostonian hey, do you have any work about cross-sectional regression to calculate premiums? can you share it with me, please? I couldn't find any tutorials online. ideally using eviews or just excel.
how to get size premium and value premium
th-cam.com/video/Iel_GRQNAxA/w-d-xo.html
Hi Shane,
I request you to show us the procedure of forming the size and value stock portfolios of Fama and French..
how to calculate 5 factor model
He has taken just one company data ?
How to get Market risk premium, size risk premium, value risk premium?
Are the Betas not regression coefficients?
thank you - so simple
Thanks alot :D
Fama, E. F. and French, K. R. (2012) ‘Size, Value, and Momentum in International Stock Returns’, Journal ofFinancial Economics, Vol. 105, No. 3, pp. 457-472, Available at: www.sciencedirect.com/science/article/pii/S0304405X12000931 (Accessed: 11 February 2019).
Where is the Nobel Prize nomination for Fama-French? The added size and value risk premium beta alone alert CAPM instructors to the need for expanded market tools in order to just begin measuring price valuations. The betas seem sensitive to Behavioral Theory ... Isaac Newton would be proud to have had this info.
People looking for (Rm-Rf premium, SMB-premium, HML-Premium)
I would recommend you guys go here hope it helps. mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
I'm thinking my prof wants me to download the multi betas (such as B/V and SML and HML etc. to create the excel regression) but I guess it has to be daily like my returns were, but I downloaded the returns daily info from yahoo finance. How would I get the other data for multi-factor for my specific stocks? like 5 years of daily history? Do you know? I'm supposed to use the regression add-in in excel. Thank you.
how to get size premium and value premium