How do you deal with the presence of an important risk event in the data (for example, a financial crisis)?
Instructions:
Login on Keats.
Click on the following link to download the file dataset_coursework.dta.
Data have been collected from Yahoo Finance, ranging from January 1990 to March 2024 with a daily frequency.
In Column 1, "date" is reported.
Column 2 contains the variable "r_market," which is the return of the market portfolio.
Column 3, "rfr," represents the daily return for the Treasury bills, the risk-free asset.
Column 4, "hml," signifies the average return of the stocks in the high market-to-book portfolio minus the return of the stocks in the low book-to-market portfolio.
Column 5, "smb," shows the average return of stocks in a portfolio formed by small market capitalization companies minus the average returns of stocks in the portfolio formed by big market capitalisation companies (see Figure 1).
Data have been collected from the Kenneth French`s Data Library website, and the full description of the above variables is available at the provided link.
From Column 6 onward, you find the price for about 240 stocks listed in the S&P500.
Choose any one asset.
Question 1
Present and discuss the Capital Asset Pricing Model (CAPM).
Estimate the CAPM model using the data for the asset you have chosen. Report and discuss the results and whether you believe the estimate you have obtained is appropriate.
Present and discuss the Fama and French (1993) three factors model. Estimate the Fama and French (1993) three factors model using the data and discuss the results.
Compare the results for the model under question (c) with those from the model under question (a). What is the preferred model, and why? Discuss.
How do you deal with the presence of an important risk event in the data (for example, a financial crisis)? Discuss. Use the data to describe the approach you would adopt.
