CF 903 Project

Contents (hide)

  1. 1. Project details
  2. 2. Overview of the project
  3. 3. Groups

1.  Project details

You can post your questions (anonymously if you want) at the discussion page.

You will work in groups of up to 5 students. You can work alone if you want but you will not get any bonus for that. The project includes data collection, and some elementary regressions. It is not mathematically demanding. I understand that the load can be easily distributed. Nevetheless I expect every member of the group to have knowledge of every aspect of the work including possible problems.

You will submit a report with your findings which will be up to 25 pages long. It has to be in PDF format with all figures and tables clearly labeled within the text (ie not in appendices). Everything has to follow journal publication format including citations and references. Consult the Chicago Manual of Style for any formatting issues, but you are on the safe side if your output looks and feels like a Journal of Finance article.

As I said every member of the group must be familiar with every aspect of the project (eg data collection, econometric issues, etc) After submission you will have a 5-10 minute interview with me where I will ask questions on the project. For instance:

  • Question: <<Is the R-square adjusted or not?>>
  • Answer: <<I don't know. This was not my part of the project, XYZ did the estimation>>, is not acceptable.

Your mark will depent on the ouput and the interview.

The deadline is the end of the second week after the New Year break.

2.  Overview of the project

The CAPM uses a single factor to compare a portfolio with the market as a whole. This factor is called the beta. This is an over-simplification of the market place. Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole:

  • small caps and
  • stocks with a high book-value-to-price ratio (customarily called value stocks; to be differentiated from growth stocks).

They then added two factors to CAPM to reflect a portfolio's exposure to these two classes:

\fs4 r_P - r_F = \beta \cdot \left( r_M - r_F \right) + \beta_S \cdot SMB + \beta_V \cdot HML + \alpha

Here \fs4 r_P is the portfolio's return rate, \fs4 r_F is the risk-free return rate and \fs4 r_M is the return of the whole stock market. The three factor \fs4 \beta is analogous to the classical \fs4 \beta but not equal to it, since there are now two additional factors to do some of the work. SMB and HML stand for "small cap minus big cap" and "high book/price minus low"; they measure the historic excess returns of small caps and "value" stocks over the market as a whole.

By the way SMB and HML are defined, the corresponding coefficients \fs4 \beta_S and \fs4 \beta_V take values on a scale of roughly 0 to 1: \fs4 \beta_S = 1 would be a small cap portfolio while \fs4 \beta_S = 0 would be large cap; \fs4 \beta_V = 1 would be a portfolio with a high book/price ratio, etc.

This three-factor model is becoming the benchmark of portfolio management. Check morningstar.com and you will see that funds are classified within a 3x3 size/value grid. Many index funds are being offered based on the three FF factors. Ken French has the 3 factors for the US on his website.

There are hundreds of thousands of references to the seminar FF paper. If you just Google you will get what you probably need, and more.

I want you to replicate (as far as you can) the famous paper of FF using UK data (rather than US):

'''Multifactor Explanations of Asset Pricing Anomalies by Eugene F. Fama and Kenneth R. FrencH, The Journal of Finance, Vol. 51, No. 1 (Mar., 1996), pp. 55-84'''

Of course this is an old paper, it is your job to find more recent references, tests and possible extensions. Any book on asset pricing will be a good first source of information.

You have to download data and create portfolios with different characteristics. Then you have to verify (or not) the FF results. You are free to select any portfolios you want, any frequency you want and any sample period you want. But you have to justify your choices. Essentially every group will work with different data: it will be interesting to see if the results of all groups are in line (although they don't have to be)

Kyriakos 20-12-06

3.  Groups

Use the template below to input your group name and a list of group members (first name first). Just append your group in the end of the list and follow the format of the examples:

Group name

  1. Member 1
  2. Member 2
  3. Member 3

Night time investments (example)

  1. Johnathan Harker
  2. Wilhelmina Murray
  3. Vlad the Impaler
  4. Abraaham Van Helsing

Coming soon

  1. Iacopo Giampaoli
  2. Anil Khuman
  3. Yue Peng
  4. Aswin Nenduradu
  5. Andrew Stavrinos

The Group Without A Name

  1. Alvin - Xi Wang
  2. Jacky - Wu Xiao
  3. Nicholas
  4. Soud Hyder

HOT CAPM

  1. guo shuai
  2. liang yili
  3. wang ying
  4. daiwei yun
  5. shi jiming

The Alpha and The Omega

  1. Bryan Jones
  2. Chris Parker

CF903 project

  1. daliang yin
  2. gengpu zhang
  3. rong xu
  4. yiteng zhang

FF1996

  1. Azeem Malik

F&F ?? French Frice!!

  1. Marco - Kuan Chun, Chen

FF 903 Famous Five

  1. Darragh Donnelly
  2. Jenny Castellanos
  3. Leyla King
  4. Yancong Yu
  5. Michael Kampouridis

Me, Myself and Dodd

  1. Lisa Dodd


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