Asset Pricing, the Fama-French Factor Model and the Implications of Quantile Regression Analysis
Document Type
Conference Proceeding
Publisher
UNSW Australian School of Business
Faculty
Faculty of Business and Law
School
School of Accounting, Finance and Economics
RAS ID
10038
Abstract
In traditional tests of asset pricing theory Ordinary Least Squares (OLS) regression methods are used in empirical tests of factor models, which implies a focus on the means of the distributions of covariates. The work of Koenker and Basset (1982) and Koenker (2005) provides an alternative via Quantile regression featuring inference about conditional quantile functions. This study empirically examines the behaviour of the three risk factors from Fama-French Three Factor model of stock returns, beyond the mean of the distribution, by using quantile regressions and a US data set. The study not only shows that the factor models does not necessarily follow a linear relationship but also shows that the traditional method of OLS become less effective when it comes to analysing the extremes within a distribution, which is often of key interest to investors and risk managers.
Comments
Allen, D. E., Singh, A. K. , & Powell, R. J. (2009). Asset Pricing, the Fama-French Factor Model and the Implications of Quantile Regression Analysis. Proceedings of 22nd Australasian Finance and Banking Conference 2009. (pp. 1-19). Sydney. UNSW Australian School of Business. Available here