ECM1002

ECONOMETRIC
Assignment

Student name: Bui Duy Trung

Student ID: 20930149

Campus: HANU Tutor’s name: Mr Pham Van Hung

Class: BBUS34 Day&Time: 21/05/2023

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Section 1

Question 1.

Advantages of the Fama-French 5-factor model:

 Capturing additional sources of risk: The 5-factor model includes two additional
factors, profitability (RMW) and investment (CMA), which aim to capture the
variations in average returns related to profitability and investment patterns. By
incorporating these factors, the model provides a more comprehensive framework for
explaining stock returns (Fama & French, 2015).
 Improved explanatory power: The 5-factor model has a higher explanatory power
than the 3-factor model. It performs better in capturing the size, value, profitability,
and investment patterns in average stock returns, which results in a higher percentage
of cross-sectional variance explained (Fama & French, 2015).
 Consistency with valuation theory: The inclusion of profitability and investment
factors in the 5-factor model is consistent with valuation theory. The model considers
the decomposition of cash flows and expected returns based on prices, future
dividends, profitability, and investment factors (Fama & French, 2015).

Disadvantages of the Fama-French 5-factor model:

 Failure to capture low average returns on small stocks: One of the main problems of
the 5-factor model is its inability to adequately explain the low average returns on
small stocks that behave similarly to firms with high investment but low profitability.
This suggests that the model may not fully capture all aspects of the risk associated
with these stocks (Fama & French, 2015).
 Redundancy of the value factor: With the addition of the profitability and investment
factors, the value factor (HML) from the 3-factor model becomes redundant for
describing average returns in the examined sample. This indicates that the value
factor's explanatory power is subsumed by the new factors and may not provide
unique information (Fama & French, 2015).

Overall, the Fama-French 5-factor model improves upon the 3-factor model by capturing
additional risk factors related to profitability and investment, resulting in higher explanatory
power. However, it still has limitations in explaining the low average returns on small stocks,
rendering the value factor redundant.

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Question 2.

Article 1: Cakici, N. (2015) ‘The five-factor Fama-French model: International evidence’,

SSRN Electronic Journal, p. 51. doi:10.2139/ssrn.2601662.

The research conducted in this paper aims to address several key questions regarding the
applicability of the Fama-French 5-factor model in different regions across the world. The
authors investigate whether the model can effectively explain the variations in international
equity returns and explore the extent to which regional markets are integrated. They also
examine the redundancy of factors within the 5-factor model and compare the performance of
regional factors to global factors. The study utilizes stock returns data from various capital
markets over a 23-year period. The findings suggest that the 5-factor model performs well in
North America, Europe, and the global market, but exhibits weaker results in Japan and Asia
Pacific. Regional factors consistently outperform global factors, indicating incomplete market
integration. The value factor (HML) is strong in most regions, except for North America,
where its significance is marginal. The profitability factor (RMW) is not significant in any
region, while the investment factor (CMA) is only significant in the global and European
markets. The research casts doubt on the overall applicability of the 5-factor model in regions
outside of North America, Europe, and the global market, particularly in Japan and the Asia
Pacific. These findings contribute to the empirical understanding of asset pricing and
international finance.

Article 2: Bhaskaran, R. K., & Kovilathumpaday Sukumaran, S. (2022). Empirical

examination of an integrative model for asset pricing – evidence from US market. Review of
Behavioral Finance, 14(5), 612–626. https://doi.org/10.1108/RBF-01-2021-001

In their research, the authors focus on asset pricing, financial economics, and behavioral
finance, specifically examining the cross-sectional variation in stock returns and market
anomalies. Their primary objective is to comprehensively analyze the determinants of stock
returns using the Fama-French five-factor model. The data utilized in the related articles
cover a substantial period from April 2000 to April 2020 and are based on monthly returns of
US portfolios. The study primarily concentrates on the US stock market, utilizing data from
stocks listed on major exchanges such as NYSE, AMEX, and NASDAQ. Various
characteristics including size, book-to-market ratio, operating profit, investment, earnings-to-
price ratio, cash flow-to-price ratio, dividend yield, and industry portfolio returns are
considered. The authors' findings highlight the significant role of investor sentiments in
influencing portfolio stock returns, displaying a positive impact. Conversely, macroeconomic
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factors, Fama-French, and momentum factors demonstrate negative influences on portfolio
stock returns. These findings hold important implications for policymakers and offer valuable
insights into the factors driving stock returns in the US market.

Article 3: Jiao, W., & Lilti, J.-J. (2017). Whether profitability and investment factors have
additional explanatory power comparing with Fama-French Three-Factor Model: empirical
evidence on Chinese A-share stock market. China Finance and Economic Review, 5(1), 1.
https://doi.org/10.1186/s40589-017-0051-5

The article aims to investigate the additional explanatory power of profitability and
investment factors (RMW and CMA) compared to the Fama-French Three-Factor Model in
the Chinese A-share stock market. The research focuses on applying the Fama-French Five-
Factor Model in the context of asset pricing and assessing its effectiveness in the Chinese
market. The study utilizes data from July 2010 to May 2015, specifically concentrating on the
Chinese A-share stock market. Three portfolios are constructed: Size-B/P portfolios, Size-OP
portfolios, and Size-Inv portfolios, all weighted by value. The findings reveal that the Fama-
French Five-Factor Model performs slightly better in explaining the time-series variation of
average excess stock returns in the US stock market compared to the Chinese A-share stock
market. In the US market, the profitability factor (RMW) and investment factor (CMA)
contribute partially to explaining the returns of the portfolios, while in the Chinese market,
the profitability factor only exhibits explanatory power for the Size-OP portfolios. The
authors suggest that future research should consider incorporating factors that account for the
unique characteristics of the Chinese stock market.

Article 4: Sarwar, G., Mateus, C., & Todorovic, N. (2018). US sector rotation with five-factor
Fama–French alphas. Journal of Asset Management, 19(2), 116–132.
https://doi.org/10.1057/s41260-017-0067-2

The objective of the research is to analyze the risk-adjusted performance of US sector

portfolios and sector rotation strategies using the alphas derived from the Fama-French five-
factor model. The study also compares the performance of the five-factor model with the
three-factor model and explores the influence of business cycles on trading strategies. The
research focuses on the application of the Fama-French Five-Factor Model in analyzing US
sector portfolios and sector rotation strategies. The data used cover the period from January

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1967 to December 2014 and centers on the Fama-French US sector portfolios. The study also
considers the trading of comparable sector ETFs based on the Fama-French alphas. The
findings indicate that the Fama-French five-factor model provides a better fit for the returns
of US sector portfolios compared to the three-factor model. Significant alphas are observed in
all sectors at various points in time. Implementing a long-only sector rotation strategy based
on positive five-factor alphas yields higher returns and Sharpe ratios in comparison to the
S&P 500 buy-and-hold strategy. Moreover, incorporating business cycles into trading
strategies enhances performance. However, the long-short strategy does not perform as well.
The authors suggest that sector rotation strategies that consider different stages of the
business cycle have the potential to outperform the market.

Comparison:

The reviewed articles explore the applicability of the Fama-French five-factor model in
different contexts. While the model performs well in North America, Europe, and the global
market, it exhibits weaker results in Japan and the Asia Pacific region. The impact of factors
within the model varies across regions, emphasizing the need for regional customization.
Investor sentiments have a positive influence on portfolio stock returns, while
macroeconomic factors and the Fama-French factors show negative influences. The model
provides a better fit for US sector portfolios compared to the three-factor model, and
incorporating business cycles improves performance. Future research can focus on regional
customization, incorporating behavioral factors, exploring other asset classes, and examining
the impact of technological advancements.

Section 2

Question 1.

Dependent Variable: OTHER-RF

Method: Least Squares
Date: 05/17/23 Time: 13:53
Sample: 7/01/1963 4/29/2022
Included observations: 14810

Variable Coefficient Std. Error t-Statistic Prob.

C -0.008210 0.002704 -3.036584 0.0024

MKT_FT 1.090846 0.002905 375.5678 0.0000

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 SMB 0.122930 0.005275 23.30383 0.0000
HML 0.545933 0.005713 95.55198 0.0000
RMW 0.037501 0.007399 5.068586 0.0000
CMA -0.260136 0.009232 -28.17833 0.0000

R-squared 0.921461     Mean dependent var 0.027495

Adjusted R-squared 0.921435     S.D. dependent var 1.170667
S.E. of regression 0.328132     Akaike info criterion 0.609606
Sum squared resid 1593.960     Schwarz criterion 0.612687
Log likelihood -4508.135     Hannan-Quinn criter. 0.610629
F-statistic 34737.71     Durbin-Watson stat 1.847826
Prob(F-statistic) 0.000000

a. Estimated Equation:

ROTHER – RF = -0.0082 + 1.0908(RM – RF) + 0.1229SMBt + 0.5459HMLt + 0.0375RMWt –

0.2601CMAt + ei

b. Coefficient of Determination (R2):

The coefficient of determination is a statistical metric that examines how variations in one
variable may be explained by the variation in another one when predicting the outcome of an
event. In other words, the more often used R-squared (or R 2) coefficient assesses the strength
of the linear relationship between two variables. A more accurate way to assess goodness of
fit is with R2. The amount of the dependent variable's volatility that the model can take into
consideration.

An R2 of 0.92 may be calculated for a straightforward linear regression that forecasts the
dependent variable (Rother – Rf) from the independent variable (Rm-Rf, SMB, HML, RMW,
and CMA). Consequently, 92% of the variation in the market risk premium, size premium,
value premium, profitability premium, and investment premium are all factors that predict the
excess return of other industries. The model is unable to account for 8% of the variation in
the excess return of other industries.

Question 2.

H0: β i=0

H1: β i≠0 (i=1,2,3,4,5)

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Beta t-value t-critical P value Comparison

β1 375.57 1.96 0.0000 Reject H0

β2 23.30 1.96 0.0000 Reject H0

β3 95.55 1.96 0.0000 Reject H0

β4 5.06 1.96 0.0000 Reject H0

β5 -28.18 1.96 0.0000 Reject H0

a. Market Risk Premium (RM – RF)

- 1.09 change of excess return of other industries is expected in response to a unit
change of market risk premium.
- Since |375.57| > 1.96 we reject the null hypothesis that β 1 = 0 at 5% significance
level. We conclude that there is a statistically significant relationship between the
excess return of other industries and market risk premium.
b. Size premium (SMB)
- 0.12 change of excess return of other industries is expected in response to a unit
change of size premium.
- Since |23.3| > 1.96 we reject the null hypothesis that β 2 = 0 at 5% significance level.
We conclude that there is a statistically significant relationship between the excess
return of other industries and size premium.
c. Value premium (HML)
- 0.55 change of excess return of other industries is expected in response to a unit
change of value premium.
- Since |95.55| > 1.96 we reject the null hypothesis that β3 = 0 at 5% significance level.
We conclude that there is a statistically significant relationship between the excess
return of other industries and value premiums.
d. Profitability premium (RMW)
- 0.04 change of excess return of other industries is expected in response to a unit
change of differences in the average return of robust and weak portfolios.
- Since |5.06| > 1.96 we reject the null hypothesis that β 4 = 0 at 5% significance level.
We conclude that there is a statistically significant relationship between the excess
return of other industries and differences in the average return of robust and weak
portfolios.
e. Investment premium (CMA)

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 - -0.26 change of excess return of other industries is expected in response to a unit
change of differences in the average return of conservative and aggressive portfolios.
- Since |−28.18| > 1.96 we reject the null hypothesis that β 5 = 0 at 5% significance
level. We conclude that there is a statistically significant relationship between the
excess return of other industries and differences in the average return of conservative
and aggressive portfolios.

Question 3.

a. Jarque-Bera test

H0: Skewness = 0 and Kurtosis = 3

H1: Skewness ≠ 0 and Kurtosis ≠ 3

- Test statistic:

14810
¿ (13.3755−3)2
JB = 0.4281 +
2
) = 66882.026
6 4

- Decision rule:

Reject the null hypothesis if a calculated value of the statistic exceeds a critical value or p-
value < α.

- Conclusion:

Since p-value = 0 < 0.05 we do not reject H0 at 5% level of significance evidence of

normality of Error term

b. Regression Specification Error Test

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ROTHER – RF = = -0.0082 + 1.0908(RM – RF) + 0.1229SMBt + 0.5459HMLt + 0.0375RMWt –
0.2601CMAt + ᵧ1 ^y 2 + ᵧ2 ^y 3 + ei

H0: ᵧ1 = ᵧ2 = 0

H1: ᵧ1≠ ᵧ2 ≠ 0

- Test statistic:

2 2
14810−8 (0.9214 −0.9217 )
F= * = 26.62074
2 (1−0.9214 2)
Fc = F(J,N-K) = F(2,14810-4) = 3

- Decision rule:

Failure to Reject H0 indicates no evidence of model misspecification.

- Conclusion:
Since F= 26.62074> Fc= 3, Reject H0 at the 5% level of significance. The evidence suggests
that the restriction does not hold. Evidence of Model Misspecificationn.

Ramsey RESET Test

Equation: EQ01
Specification: OTHER-RF C MKT_FT SMB HML RMW CMA
Omitted Variables: Powers of fitted values from 2 to 3

Value df Probability
F-statistic  26.62074 (2, 14802)  0.0000
Likelihood ratio  53.17469  2  0.0000

F-test summary:
Mean
Sum of Sq. df Squares
Test SSR  5.712786  2  2.856393
Restricted SSR  1593.960  14804  0.107671
Unrestricted SSR  1588.247  14802  0.107300

LR test summary:
Value
Restricted LogL -4508.135
Unrestricted LogL -4481.547

Unrestricted Test Equation:

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Dependent Variable: OTHER-RF
Method: Least Squares
Date: 05/17/23 Time: 14:00
Sample: 7/01/1963 4/29/2022
Included observations: 14810

Variable Coefficient Std. Error t-Statistic Prob.

C -0.011923 0.002775 -4.296304 0.0000

MKT_FT 1.096744 0.003225 340.0888 0.0000
SMB 0.122876 0.005277 23.28553 0.0000
HML 0.549300 0.005841 94.03696 0.0000
RMW 0.037514 0.007386 5.078756 0.0000
CMA -0.258712 0.009224 -28.04798 0.0000
FITTED^2 0.002679 0.000526 5.090595 0.0000
FITTED^3 -0.000129 5.16E-05 -2.498666 0.0125

R-squared 0.921743     Mean dependent var 0.027495

Adjusted R-squared 0.921706     S.D. dependent var 1.170667
S.E. of regression 0.327566     Akaike info criterion 0.606286
Sum squared resid 1588.247     Schwarz criterion 0.610393
Log likelihood -4481.547     Hannan-Quinn criter. 0.607649
F-statistic 24906.14     Durbin-Watson stat 1.845271
Prob(F-statistic) 0.000000

Question 4.

a. Breusch-Pagan-Godfrey test:
- Variance equation:
σ 2 = α1 + α2(RM – RF) + α3SMB + α4HML + α5RMW + α6CMA
- Homoskedasticity: H0: α2 = α3 = α4 = α5 = α6 = 0
- Auxiliary regression: e^ 2i = α1 + α2(RM – RF) + α3SMB + α4HML + α5RMW + α6CMA
2
- Test statistic: NR2 x 5

NR2 = 369.7763
P-value = 0
- Decision rule: Rejection of H0 is evidence against homoskedasticty
- Conclusion: since P-value = 0 < 0.05 Reject H0. Evidence of heteroskedasticity

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 75.81833     Prob. F(5,14804) 0.0000

Obs*R-squared 369.7763     Prob. Chi-Square(5) 0.0000
Scaled explained SS 2286.231     Prob. Chi-Square(5) 0.0000

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Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/17/23 Time: 14:03
Sample: 7/01/1963 4/29/2022
Included observations: 14810

Variable Coefficient Std. Error t-Statistic Prob.

C 0.105828 0.003081 34.34522 0.0000

MKT_FT 0.016307 0.003310 4.926552 0.0000
SMB -0.057134 0.006011 -9.504150 0.0000
HML 0.073363 0.006511 11.26737 0.0000
RMW 0.081333 0.008432 9.646214 0.0000
CMA -0.031622 0.010521 -3.005756 0.0027

R-squared 0.024968     Mean dependent var 0.107627

Adjusted R-squared 0.024639     S.D. dependent var 0.378633
S.E. of regression 0.373940     Akaike info criterion 0.870960
Sum squared resid 2070.055     Schwarz criterion 0.874040
Log likelihood -6443.457     Hannan-Quinn criter. 0.871982
F-statistic 75.81833     Durbin-Watson stat 1.425603
Prob(F-statistic) 0.000000

b. White’s test
- Variance equation:
σ 2 = α1 + α2(RM – RF) + α3SMB + α4HML + α5RMW + α6CMA + α7(RM – RF)2 + α8SMB2 +
α9HML2 + α10RMW2 + α11CMA2 + α12(RM – RF) *SMB + α13(RM – RF)*HML + α14(RM –
RF)*RMW + α15(RM – RF)*CMA + α16SMB*HML + α17SMB*RMW + α18SMB*CMA +
α19HML*RMW + α20HML*CMA + α21 RMW*CMA
- Homoskedasticity: H0: α2 = α3 = α4 = … = α21 = 0
- Auxiliary regression:
2
e^ i = α1 + α2(RM – RF) + α3SMB + α4HML + α5RMW + α6CMA + α7(RM – RF) + α8SMB +
2 2

α9HML2 + α10RMW2 + α11CMA2 + α12(RM – RF) *SMB + α13(RM – RF)*HML + α14(RM –

RF)*RMW + α15(RM – RF)*CMA + α16SMB*HML + α17SMB*RMW + α18SMB*CMA +
α19HML*RMW + α20HML*CMA + α21 RMW*CMA
2
- Test statistic: NR2 x 20

NR2 = 4593.470
P-value = 0
- Decision rule: Rejection of H0 is evidence against homoskedasticty
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 - Conclusion: since P-value = 0 < 0.05 Reject H0. Evidence of heteroskedasticity

Heteroskedasticity Test: White

F-statistic 332.4653     Prob. F(20,14789) 0.0000

Obs*R-squared 4593.470     Prob. Chi-Square(20) 0.0000
Scaled explained SS 28400.24     Prob. Chi-Square(20) 0.0000

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/17/23 Time: 14:05
Sample: 7/01/1963 4/29/2022
Included observations: 14810

Variable Coefficient Std. Error t-Statistic Prob.

C 0.042682 0.002955 14.44317 0.0000

MKT_FT^2 0.006648 0.000855 7.774639 0.0000
MKT_FT*SMB -0.023081 0.002830 -8.156204 0.0000
MKT_FT*HML -0.004675 0.003107 -1.504692 0.1324
MKT_FT*RMW 0.060963 0.005013 12.16086 0.0000
MKT_FT*CMA 0.009132 0.006650 1.373235 0.1697
MKT_FT 0.009800 0.002859 3.428109 0.0006
SMB^2 0.030018 0.003178 9.445525 0.0000
SMB*HML -0.003426 0.005531 -0.619387 0.5357
SMB*RMW -0.116455 0.009621 -12.10417 0.0000
SMB*CMA -0.129456 0.011428 -11.32840 0.0000
SMB -0.005432 0.005153 -1.054188 0.2918
HML^2 0.040543 0.003562 11.38232 0.0000
HML*RMW -0.070165 0.008116 -8.644806 0.0000
HML*CMA -0.095201 0.013166 -7.231034 0.0000
HML 0.041968 0.005550 7.562371 0.0000
RMW^2 0.186164 0.008315 22.38820 0.0000
RMW*CMA 0.149810 0.014284 10.48827 0.0000
RMW 0.039428 0.007221 5.459899 0.0000
CMA^2 0.112588 0.013204 8.526638 0.0000
CMA -0.031669 0.008933 -3.545004 0.0004

R-squared 0.310160     Mean dependent var 0.107627

Adjusted R-squared 0.309227     S.D. dependent var 0.378633
S.E. of regression 0.314692     Akaike info criterion 0.526975
Sum squared resid 1464.574     Schwarz criterion 0.537756
Log likelihood -3881.248     Hannan-Quinn criter. 0.530554
F-statistic 332.4653     Durbin-Watson stat 1.670956
Prob(F-statistic) 0.000000

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Question 5.

H0: ρ s = 0

H1: ρ s ≠ 0 for s = 1, 2, 3, …, 10.

a
- Test statistic: Z= √ T rs N (0,1)

Reject H0 if -1.96 < Z or Z > 1.96 at a 5% level of significance.

- Decision rule:

Reject H0 at a 5% level of significance if the sample value rk lies outside the 95% confidence
band

- Conclusion: Most of the autocorrelation values are within the 95% confidence band:
Do not reject H0
- Evidence of White Noise

Question 6.

a.

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Time series showing cycles, noise, with mean-reversion. It has a Variance Shift

b. AR (1) Model:

Dependent Variable: OTHER

Method: Least Squares
Date: 05/14/23 Time: 16:08
Sample (adjusted): 7/02/1963 4/29/2022
Included observations: 14809 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.043441 0.009622 4.514892 0.0000

OTHER(-1) 0.031138 0.008216 3.789905 0.0002

R-squared 0.000969    Mean dependent var 0.044842

Adjusted R-squared 0.000902    S.D. dependent var 1.170547
S.E. of regression 1.170019    Akaike info criterion 3.152052
Sum squared resid 20269.96    Schwarz criterion 3.153079
Log likelihood -23337.37    Hannan-Quinn criter. 3.152393
F-statistic 14.36338    Durbin-Watson stat 2.000501
Prob(F-statistic) 0.000151

Othert = + Othert-1 + et

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Othert = 0.0434 + 0.0311 Othert-1 + et

 = 0.0311: AR (1) model is equivalent to white noise

As the value of ≈ 0, the time series becomes unpredictable and non-systematic, reflecting a
low degree of dependence.

1. SACF for AR (1) time Series

All of the autocorrelation values are within the 95% confidence band. Residuals show
evidence of White Noise

 An AR (1) model is statistically adequate.

Question 7. Microsoft in DJIA | Dow Jones Industrial Average Index when the Pfizer and
BioNTech COVID-19 vaccines announcement on November 9, 2020

Dependent Variable: MICROSOFT-RF

Method: Least Squares
Date: 05/21/23 Time: 14:27
Sample (adjusted): 9/08/2020 12/29/2020
Included observations: 81 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.000620 0.000771 -0.804146 0.4239

MKT_RF 0.013842 0.000732 18.90599 0.0000
SMB -0.007578 0.001339 -5.660361 0.0000
HML -0.001364 0.001074 -1.270302 0.2079
RMW -0.001266 0.002002 -0.632397 0.5291
CMA -0.001215 0.002340 -0.519144 0.6052

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R-squared 0.878090     Mean dependent var 0.000462
Adjusted R-squared 0.869962     S.D. dependent var 0.018333
S.E. of regression 0.006611     Akaike info criterion -7.128940
Sum squared resid 0.003278     Schwarz criterion -6.951574
Log likelihood 294.7221     Hannan-Quinn criter. -7.057778
F-statistic 108.0413     Durbin-Watson stat 2.321252
Prob(F-statistic) 0.000000

1. Estimated Equation:

RMicrosoft – RF = -0.0006 + 0.0138(RM – RF) – 0.0076SMB2020 – 0.0014HML2020 –

0.0013RMW2020 – 0.0012CMA2020 + ei

2. Coefficient of Determination (R2):

An R2 of 0.8781 may be calculated for a straightforward linear regression that forecasts the
dependent variable (Rother – Rf) from the independent variable (Rm-Rf, SMB, HML, RMW,
and CMA). Consequently, 87,81% of the variation in the market risk premium, size premium,
value premium, profitability premium, and investment premium are all factors that predict the
excess return of other industries. The model is unable to account for 13% of the variation in
the excess return of other industries.

3. T-test

H0: β i=0

H1: β i≠0 (i=1,2,3,4,5)

Beta t-value t-critical P value Comparison

β1 18.90599 1.96 0.0000 Reject H0

β2 -5.660361 1.96 0.0000 Reject H0

β3 -1.270302 1.96 0.2079 Can not reject H0

β4 -0.632397 1.96 0.5291 Can not reject H0

β5 -0.519144 1.96 0.6052 Can not reject H0

a. Market Risk Premium (RM – RF)

- 0.0138 change of excess return of other industries is expected in response to a unit
change of market risk premium.
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 - Since |18.90| > 1.96 we reject the null hypothesis that β1 = 0 at 5% significance level.
We conclude that there is a statistically significant relationship between the excess
return of other industries and market risk premium.
b. Size premium (SMB)
- -0.0076 change of excess return of other industries is expected in response to a unit
change of size premium.
- Since |−5.66| > 1.96 we reject the null hypothesis that β2 = 0 at 5% significance level.
We conclude that there is a statistically significant relationship between the excess
return of other industries and size premium.
c. Value premium (HML)
- – 0.0014 change of the excess return of other industries is expected in response to a
unit change of value premium.
- Since |−1.27| < 1.96 we cannot reject the null hypothesis that β3 = 0 at 5%
significance level. We conclude that there is a statistically significant relationship
between the excess return of other industries and value premiums.
d. Profitability premium (RMW)
- – 0.0013 change of excess return of other industries is expected in response to a unit
change of differences in the average return of robust and weak portfolios.
- Since |−0.63| < 1.96 we cannot reject the null hypothesis that β4 = 0 at 5%
significance level. We conclude that there is a statistically significant relationship
between the excess return of other industries and differences in the average return of
robust and weak portfolios.
e. Investment premium (CMA)
- – 0.0012 change of excess return of other industries is expected in response to a unit
change of differences in the average return of conservative and aggressive portfolios.
- Since |−0.52| < 1.96 we cannot reject the null hypothesis that β5 = 0 at 5%
significance level. We conclude that there is a statistically significant relationship
between the excess return of other industries and differences in the average return of
conservative and aggressive portfolios.

4. Jarque-Bera test

H0: Skewness = 0 and Kurtosis = 3

H1: Skewness ≠ 0 and Kurtosis ≠ 3

- Test statistic:

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 2
81
JB = ¿0.692 + ( 4.06−3) ) = 10.29
6 4

- Decision rule:

Reject the null hypothesis if a calculated value of the statistic exceeds a critical value or p-
value < α.

- Conclusion:

Since p-value = 0.005 < 0.05 we do not reject H0 at 5% level of significance evidence of
normality of Error term

5. Reset test

Ramsey RESET Test

Equation: EQMICRO
Specification: MICROSOFT-RF C MKT_RF SMB HML RMW CMA
Omitted Variables: Powers of fitted values from 2 to 3

Value df Probability
F-statistic  2.434956 (2, 73)  0.0947
Likelihood ratio  5.230996  2  0.0731

F-test summary:
Mean
Sum of Sq. df Squares
Test SSR  0.000205  2  0.000103
Restricted SSR  0.003278  75  4.37E-05

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Unrestricted SSR  0.003073  73  4.21E-05

LR test summary:
Value
Restricted LogL  294.7221
Unrestricted LogL  297.3376

Unrestricted Test Equation:

Dependent Variable: MICROSOFT-RF
Method: Least Squares
Date: 05/21/23 Time: 14:27
Sample: 9/08/2020 12/29/2020
Included observations: 81

Variable Coefficient Std. Error t-Statistic Prob.

C 0.000212 0.000886 0.238904 0.8118

MKT_RF 0.013910 0.001032 13.48298 0.0000
SMB -0.007713 0.001386 -5.563082 0.0000
HML -0.001452 0.001055 -1.375904 0.1731
RMW -0.001027 0.001977 -0.519237 0.6052
CMA -0.002322 0.002370 -0.979560 0.3305
FITTED^2 -2.834097 1.442367 -1.964893 0.0532
FITTED^3 -14.59114 38.28514 -0.381118 0.7042

R-squared 0.885714     Mean dependent var 0.000462

Adjusted R-squared 0.874755     S.D. dependent var 0.018333
S.E. of regression 0.006488     Akaike info criterion -7.144138
Sum squared resid 0.003073     Schwarz criterion -6.907649
Log likelihood 297.3376     Hannan-Quinn criter. -7.049255
F-statistic 80.82107     Durbin-Watson stat 2.245170
Prob(F-statistic) 0.000000

6. Breusch-Pagan-Godfrey test

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.391843     Prob. F(5,75) 0.2370

Obs*R-squared 6.877766     Prob. Chi-Square(5) 0.2299
Scaled explained SS 9.034834     Prob. Chi-Square(5) 0.1077

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/21/23 Time: 14:27
Sample: 9/08/2020 12/29/2020

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Included observations: 81

Variable Coefficient Std. Error t-Statistic Prob.

C 4.03E-05 8.22E-06 4.908804 0.0000

MKT_RF 2.66E-06 7.80E-06 0.340954 0.7341
SMB -1.85E-05 1.43E-05 -1.295166 0.1992
HML 2.93E-07 1.14E-05 0.025655 0.9796
RMW -4.13E-05 2.13E-05 -1.938215 0.0564
CMA 3.61E-05 2.49E-05 1.446978 0.1521

R-squared 0.084911     Mean dependent var 4.05E-05

Adjusted R-squared 0.023905     S.D. dependent var 7.13E-05
S.E. of regression 7.04E-05     Akaike info criterion -16.21278
Sum squared resid 3.72E-07     Schwarz criterion -16.03541
Log likelihood 662.6174     Hannan-Quinn criter. -16.14161
F-statistic 1.391843     Durbin-Watson stat 1.782292
Prob(F-statistic) 0.237039

7. White test

Heteroskedasticity Test: White

F-statistic 2.007474     Prob. F(20,60) 0.0199

Obs*R-squared 32.47254     Prob. Chi-Square(20) 0.0385
Scaled explained SS 42.65687     Prob. Chi-Square(20) 0.0023

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 05/21/23 Time: 14:27
Sample: 9/08/2020 12/29/2020
Included observations: 81

Variable Coefficient Std. Error t-Statistic Prob.

C 1.70E-05 1.41E-05 1.212745 0.2300

MKT_RF^2 -1.34E-06 5.77E-06 -0.231845 0.8174
MKT_RF*SMB -1.03E-05 1.91E-05 -0.538574 0.5922
MKT_RF*HML -7.47E-06 1.66E-05 -0.449056 0.6550
MKT_RF*RMW 1.21E-05 3.14E-05 0.383937 0.7024
MKT_RF*CMA 4.05E-05 3.18E-05 1.274961 0.2072
MKT_RF 1.03E-05 8.99E-06 1.142057 0.2580
SMB^2 -2.01E-06 1.94E-05 -0.104002 0.9175
SMB*HML -3.07E-05 3.17E-05 -0.967415 0.3372
SMB*RMW 9.55E-05 5.49E-05 1.740808 0.0868
SMB*CMA 1.10E-05 4.88E-05 0.226125 0.8219

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 SMB -2.17E-05 1.45E-05 -1.497486 0.1395
HML^2 8.89E-06 1.35E-05 0.657030 0.5137
HML*RMW 7.07E-06 4.60E-05 0.153758 0.8783
HML*CMA -1.93E-05 4.73E-05 -0.407728 0.6849
HML 1.91E-05 1.45E-05 1.316726 0.1929
RMW^2 0.000109 4.18E-05 2.604776 0.0116
RMW*CMA -0.000308 7.88E-05 -3.906786 0.0002
RMW -5.19E-05 2.27E-05 -2.291935 0.0254
CMA^2 0.000189 6.07E-05 3.112894 0.0028
CMA -5.16E-06 3.17E-05 -0.162459 0.8715

R-squared 0.400896     Mean dependent var 4.05E-05

Adjusted R-squared 0.201194     S.D. dependent var 7.13E-05
S.E. of regression 6.37E-05     Akaike info criterion -16.26599
Sum squared resid 2.44E-07     Schwarz criterion -15.64521
Log likelihood 679.7727     Hannan-Quinn criter. -16.01693
F-statistic 2.007474     Durbin-Watson stat 1.701481
Prob(F-statistic) 0.019942

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References

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integrative model for asset pricing – evidence from US market. Review of
Behavioral Finance, 14(5), 612–626. https://doi.org/10.1108/RBF-01-2021-001

Cakici, N. (2015) ‘The five-factor Fama-French model: International evidence’, SSRN

Electronic Journal, p. 51. doi:10.2139/ssrn.2601662.
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Fama, E.F and French, K.R. (2015). “A five-factor asset pricing model”, Journal of Financial
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Jiao, W., & Lilti, J.-J. (2017). Whether profitability and investment factors have additional
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https://doi.org/10.1057/s41260-017-0067-2

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