BFF5040 ASA Group 18 Assignment FINAL 1 
ADVANCED SECURITY ANALYSIS
[BFF5040]
“THE FAMA-FRENCH CASE STUDY”
_____________________________________
GROUP ASSIGNMENT
GROUP 18
ALEX LEE [26268418]
JIANNAN ZHANG [25842528]
XUAN ANH NGO [26274736]
YIMING BAI [26413760]
ZHOUJING LI [25675087]
WORD COUNT: 2,918 WORDS
CONTENTS
EXECUTIVE SUMMARY 3
PART ONE. IN-SAMPLEAPPLICATION OF MODEL 3
1.1. FIRST-PASS REGRESSION OF 20 ASSETS 3
1.2 SECOND-PASS REGRESSION OF 20 ASSETS 4
PART TWO. OUT-OF-SAMPLE MODEL PERFORMANCE 5
2.1. CONSTRUCTION OF OUT-OF-SAMPLE PORTFOLIOS 5
2.2 EVALUATION OF OUT-OF-SAMPLE PORTFOLIOS 6
PART THREE. TESTS OF MOMENTUM-BASED PORTFOLIOS 8
3.1 CONSTRUCTION OF MOMENTUM-BASED PORTFOLIOS 8
3.2 EVALUATION OF MOMENTUM PORTFOLIOS 8
APPENDIX 12
A1 FIRST-PASS REGRESSION OF 20 ASSETS 12
A2 OUT OF SAMPLE CONSTRUCTION 15
A3 MOMENTUM 17
REFERENCES 20
EXECUTIVE SUMMARY
The aim of this report is to provide a practical study in order to determine, analyse and investigate market data through the use of the famous Fama-French three factor model (FF3). Moreover, this study will test the theory and will provide evidence of the anomalies discovered in relation to the variation in stock returns. Hence, in short the study will allow for the assessment of the effectiveness of the FF3 given the market data, and the discovery of the potential limitations.
PART ONE. IN-SAMPLE APPLICATION OF MODEL
1.1 FIRST-PASS REGRESSION OF 20 ASSETS
For each of 20 assets, we obtain the first pass (time-series) regression coefficients using the Fama-French model. We are using the data from January 1999 to December 2008 (120 months) for each of 20 assets.
We run 20 regressions based on Fama-French 3 factor model:
Where Rit-Rft, MPRt, SMBt and HMLt denote the realized excess return on asset i, the realized excess return on market portfolio, the realized return on proxy portfolio for size factor and the realized return on proxy portfolio for the book to market factor at time t, respectively. The
[BFF5040]
“THE FAMA-FRENCH CASE STUDY”
_____________________________________
GROUP ASSIGNMENT
GROUP 18
ALEX LEE [26268418]
JIANNAN ZHANG [25842528]
XUAN ANH NGO [26274736]
YIMING BAI [26413760]
ZHOUJING LI [25675087]
WORD COUNT: 2,918 WORDS
CONTENTS
EXECUTIVE SUMMARY 3
PART ONE. IN-SAMPLEAPPLICATION OF MODEL 3
1.1. FIRST-PASS REGRESSION OF 20 ASSETS 3
1.2 SECOND-PASS REGRESSION OF 20 ASSETS 4
PART TWO. OUT-OF-SAMPLE MODEL PERFORMANCE 5
2.1. CONSTRUCTION OF OUT-OF-SAMPLE PORTFOLIOS 5
2.2 EVALUATION OF OUT-OF-SAMPLE PORTFOLIOS 6
PART THREE. TESTS OF MOMENTUM-BASED PORTFOLIOS 8
3.1 CONSTRUCTION OF MOMENTUM-BASED PORTFOLIOS 8
3.2 EVALUATION OF MOMENTUM PORTFOLIOS 8
APPENDIX 12
A1 FIRST-PASS REGRESSION OF 20 ASSETS 12
A2 OUT OF SAMPLE CONSTRUCTION 15
A3 MOMENTUM 17
REFERENCES 20
EXECUTIVE SUMMARY
The aim of this report is to provide a practical study in order to determine, analyse and investigate market data through the use of the famous Fama-French three factor model (FF3). Moreover, this study will test the theory and will provide evidence of the anomalies discovered in relation to the variation in stock returns. Hence, in short the study will allow for the assessment of the effectiveness of the FF3 given the market data, and the discovery of the potential limitations.
PART ONE. IN-SAMPLE APPLICATION OF MODEL
1.1 FIRST-PASS REGRESSION OF 20 ASSETS
For each of 20 assets, we obtain the first pass (time-series) regression coefficients using the Fama-French model. We are using the data from January 1999 to December 2008 (120 months) for each of 20 assets.
We run 20 regressions based on Fama-French 3 factor model:
Where Rit-Rft, MPRt, SMBt and HMLt denote the realized excess return on asset i, the realized excess return on market portfolio, the realized return on proxy portfolio for size factor and the realized return on proxy portfolio for the book to market factor at time t, respectively. The
References: Bodie, Z., “Investments 10th Edition”, United States of America: McGraw Hill, 2014 Carhart, M. M., “On Persistence in Mutual Fund Performance”, Journal of Finance, 52(1), 57-82, 1997 Jegadeesh, Narasimhan , “Evidence of predictable behavior of security returns,” Journal of Finance 45, 881-898., 1990 Lehmann, Bruce, “Fads, martingales and market efficiency,” Quarterly Journal of Economics 105, 1-28, 1990 Moskowitz, T. J., and M. Grinblatt, “Do industries explain momentum?”, Journal of Finance 54, 1249-1290, 1999 Novy-Marx, Robert,. “Is momentum really momentum?” Journal of Financial Economics, 103, 429-453, 2012