Multifactor Model

MULTIFACTOR MODEL

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Financial Instruments and Markets Prof: P. Cincinelli

Parisa AsadollahiMatin RouzehkhahSheida Fazeli Elvan Simsek

MULTIFACTOR MODEL

Introduction

CAPM

Multifactor

Capital Asset Pricing Model

Fama-French

Conducting an investigation to ascertain whether a multifactor model possesses the capability to effectively capture the sensitivity of excess returns to various risk factors.

Goal

Excess returns

Part 1

Exceptional features

Summary statistics

Summary statistics

Time Series Analysis

Part 2

book-to-market value

momentum factor

Size

Time Series Analysis

How sensitive are excess returns to risk factors?

Betas coefficients from OLS time series regressions

Cross Section Analysis

Part 3

Can risk exposures explain the variation between the portfolios mean returns?

Cross Section Analysis

Can risk exposures explain the variation between the portfolios mean returns?

Cross Section Analysis

Can risk exposures explain the variation between the portfolios mean returns?

Conclusion

MULTIFACTOR MODEL vs. CAPM

• Multifactor models explain security returns better than CAPM by considering additional factors and addressing anomalies. They also provide a clearer understanding of the volatility in financial markets.

• Observational data indicates that RMRF, or the risk premium factor, plays a crucial role in capturing and elucidating the volatility of portfolios, particularly those of significant size.

Thank you for your attention.