Python for Finance

Multifactor Models and Performance Measures
Appendix D – data case #4 – which model is
the best, CAPM, FF3, FFC4, or FF5, or others?
Currently, we have many asset pricing models. Among them, the most important ones
are CAPM, Fama-French three-factor model, Fama-French-Carhart four-factor model,
or Fama-French five-factor model. The objectives of this data case include the following:
• Becoming familiar with the method to download data
• Understanding the T-value, F-values, and adjusted R2
• Writing various Python programs to conduct the test
Definitions of those four models CAPM:
Fama-French three-factor model:
Fama-French-Carhart four-factor model:
Fama-French five-factor model:
In the preceding equation, RMV is the difference between the returns on diversified
portfolio of stocks with robust and weak profitability, and CMA is the difference
between the returns of diversified portfolios of the stocks of low and high investment
firms, which Fama and French call conservative and aggressive. If the exposures
to the five factors capture all variation in expected returns, the intercept for all
securities and portfolio should be zero. The source of the data is as follows:
• http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_
library.html
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