Hello,
I have a rather simple question: I am running a panel regression on firm performance indicators with both time and company-fixed effects.
In a second step, I want to make the step from accounting performance to market performance, with monthly excess return as dependent variable. In addition to my main independent variables, I would like to add the 5 Fama-French factors.
Up until now I have only seen the Fama French factors as control variables in time series, not in panel datasets. Can I simply run a panel regression with the factors or are there further difficulties? Furthermore, do I keep the time and firm-fixed effects?
Thank you!
If the factors are measured at the company level, that is unchanging over time, then you cannot use a fixed effects analysis. You have to switch to a random effects model. Have a look at these papers.
Article Explaining Fixed Effects: Random Effects Modeling of Time-Se...
Article Fixed and Random effects models: making an informed choice
Article Understanding and misunderstanding Group mean centering: a c...
The same applies to the factors if they are unchanging except by time and you have include fixed effects dummies for time. Another way of looking at it is that you have much less information than you think - for each factor there is is only t units and the estimation of the standard error has to take this into account.
Thank you for your answer, maybe I should have been more clear. I am doing an analysis on European data and I use the overall Fama French Factors for Europe, hence for every observation at time t, the Fama French Factors are the same. The other variables I want to investigate do vary over time and between companies of course.
There has been recent research to make one wonder if the Fama French factors are appropriate. See this link:
https://www.google.com/search?q=Fama+French+5+factor+model+criticism&rlz=1C1CHBF_enUS847US847&oq=Fama+French+5+factor+model+criticism&aqs=chrome..69i57.35198j1j8&sourceid=chrome&ie=UTF-8
Best wishes, D. Booth
- Badges
- Science topic
- Similar topics
- Mathematics
- Statistics
- Regression