Assignment Question 1

Download 30 years’ worth of monthly data for the period January 1993 to December 2022 on a company of your choice from the CRSP database via WRDS, and download the Fama-French 3 Factors from the Kenneth French Data Library or from WRDS. You can access the Kenneth French Data Library directly here: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
You will find the Fama-French 3 Factors in the “U.S. Research Returns” section of the website. Note that the returns data from the Kenneth French Data Library is in percentage form. Returns data downloaded from the CRSP database is in decimal form. You should therefore either divide the data from the Kenneth French data library by 100 or multiply the returns on your company that you download from CRSP by 100.

Using multiple regression analysis, estimate the Fama-French 3 Factor model for your company and interpret your results. In interpreting and discussing your results and the fit of your model, you should conduct any hypothesis tests you feel are relevant, as well as undertaking and interpreting diagnostic tests (for example, testing for heteroscedasticity and serial correlation) on the residuals.

In addition to the textbook and the notes, you should find the following papers useful in motivating the analysis and interpreting your results (you do not need to provide a detailed review of the papers in your answer):

French, K.R. and E.F. Fama, 1993, Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3-56. For the purposes of the
assignment, you do not need to worry about the bond factors (sections 2.1.1,
4.1 and 4.3), the discussion of the findings for bond returns, nor the material in
sections 5 and 6 (what Fama and French refer to as diagnostic testing in section 6 can be thought of more as robustness checks.)

French, K.R. and E.F. Fama, 2004, The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives 18, 25-46. The sections on “Early Empirical Tests”, “Recent Tests” and “Explanations: Irrational Pricing or Risk” should prove useful.