What is cross section of stock returns?
Cross section: How average returns change across different stock or portfolios.
Do common factors really explain the cross section of stock returns?
These seven factors cumulatively explain around 91% of the cross-sectional variations in the 278 portfolio returns. The first common factor basically captures the average anomaly and thus resembles a market factor. The other six factors capture di fferent dimensions of the large cross-section of market anomalies.
What the Fama and French 3 factors tell us about risk and return?
The Fama and French model has three factors: the size of firms, book-to-market values, and excess return on the market. In other words, the three factors used are SMB (small minus big), HML (high minus low), and the portfolio’s return less the risk-free rate of return.
What is cross-section of stocks?
Cross-sectional analysis is one of the two overarching comparison methods for stock analysis. Cross-sectional analysis looks at data collected at a single point in time, rather than over a period of time.
Where do stock returns come from?
Stock returns come from the earnings that are distributed to investors as dividends, plus the earnings the company retains and invests in its own growth. This is called the Gordon Growth Formula. D is the dividend per share; D/P is called the dividend yield.
Why is Fama French better than CAPM?
Empirical results point out that Fama and French Three Factor Model is better than CAPM according to the goal of explaining the expected returns of the portfolios. However, the paper shows that the results vary depending on how the portfolios are formed.
What does a negative HML mean?
High Minus Low
High Minus Low (HML) is a value premium; it represents the spread in returns between companies with a high book-to-market value ratio and companies with a low book-to-market value ratio.
What is the 5 factor model in investing?
A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF, 1993).
What is five-factor model investing?
The five-factor model extends the three-factor model by adding two factors: robust-minus-weak profitability (RMW) and low-minus-high (conservative-minus-aggressive) investment (CMA). Like the three-factor model, the five-factor model is an empirical asset-pricing model.
What is cross market analysis?
Cross-sectional analysis looks at data collected at a single point in time, rather than over a period of time. The analysis begins with the establishment of research goals and the definition of the variables that an analyst wants to measure.
What is the difference between cross sectional and time series analysis?
The difference between time series and cross sectional data is that time series data focuses on the same variable over a period of time while cross sectional data focuses on several variables at the same point of time. Different data types use different analyzing methods.