Hello, I have writing research does ESG factor impacts stock's market return. I am conducting this research with three factors of the FAMA french model and the fourth-factor being ESG factor.
(Stock Return-Rf) = b0 + b1 (RM- Rf) + B2 HML + b3 SMB + B4 ESG + e
I want to create this analysis at the market level.I can create this model at the individual stock level, however, I am unable to use this model at the market level because, fame french three factors are constant for all the stocks, so I can't select it as my independent variable.
Dependent Variable:
- Stock returns - 60 companies stock's yearly returns.
Independent Variable:
- Market factor (CAPM): FTSE 100/S&P100 - However, market returns would be common for each stock. So, this variable is not changing with each stock as the market return is common for all stocks.
- Firm Size (SMB): I can calculate the SMB factor using six portfolios formed using Size and Book to market value. However, this factor will also be common for each stock. Hence this variable is not changing as the change in the dependent variable.
- Book to Market Value (HMB): I have calculated the HMB factor using six portfolios formed using Size and Book to market value. However, this factor will also be common for each stock.
- ESG Factor: I have an ESG score of all stocks for five years. Now, this factor is changing each year with a change in stock returns
Is it possible to use the FAMA french factor at the market level?
When you say the “market level”, this usually would be taken to mean market-wide or across all stocks; however, I get the sense that you want a measure that’s unique at the company level.
Please note, the CAPM, Fama-French 3-factor model, and other similar asset pricing models are estimated as time series regressions if you’re looking to regress returns on the factors. You cannot try to regress 60 companies returns on factor returns.
What you could do is estimate a separate factor model regression for each company or test asset to obtain a set of coefficients (i.e. betas). These estimates would vary by company. Then, you could estimate cross-sectional Fama-MacBeth regressions with each company having a unique beta.
You may also want to look to try creating this ESG factor using a similar procedure to that employed by Fama and French for their SMB and HML factors. My interpretation of what you have done so far is to obtain a score for each company (i.e. a characteristic), but that it is not a “factor" in the sense that this term is traditionally used.
Can you explain to me the difference b0 and e?
where does HML stand for?
i cannot find the explanation of HML ?
can you share with us how you developed your conceptual model?
I had a look at the model
https://blog.quantinsti.com/fama-french-five-factor-asset-pricing-model/
is the model solving your research problem / research question
Jan Jansen bo is intercept and e is an error term.
HML is a High minus low Book to Market Value of Fama French three-factor model.
I am looking for an excel explanation on the Fama Macbeth cross-section regression model to perform this research. Can you please assist with this?
This formula is not in alignment with the text in your message or vice versa
