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CRT2 Econometrics Module 2 Submitted

The Fama-French three factor model performed better than the CAPM model at estimating the return of Accenture stock in 2019. The FFM estimated a 31.78% return compared to the actual return of 41.68%, leaving an alpha of 9.9%. In contrast, CAPM estimated a 29.54% return, with an alpha of 12.14%. Both models showed statistically significant regression results, but FFM explained more of the variation in returns with an adjusted R-square of 59% versus 52% for CAPM.

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38 views4 pages

CRT2 Econometrics Module 2 Submitted

The Fama-French three factor model performed better than the CAPM model at estimating the return of Accenture stock in 2019. The FFM estimated a 31.78% return compared to the actual return of 41.68%, leaving an alpha of 9.9%. In contrast, CAPM estimated a 29.54% return, with an alpha of 12.14%. Both models showed statistically significant regression results, but FFM explained more of the variation in returns with an adjusted R-square of 59% versus 52% for CAPM.

Uploaded by

ATANU ROYCHOUDHURY
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© © All Rights Reserved
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Q7. Which Model performed better?

Actual Return of Accenture US Equity:

Actual return of Accenture from 1-Jan-2019 to 31-Dec-2019:

//Download ACN US Equity for Calendar Year 2019

getSymbols("ACN",from = '2019-01-01', to = '2019-12-31',warnings=FALSE,auto.assign=TRUE)

ACN<-ACN[,"ACN.Adjusted"]

//Calculate daily Return

ACN_Return<-Return.calculate(ACN,method=c("log"))

//Annualized Return

sum(ACN_Return$ACN.Adjusted[-1,])

Annualized Return Based on Daily Average Return is 41.68%


CAPM Model Return

 Accenture Beta from Yahoo Finance is 1.11


 SP500 Return from 2019-01-01 to 2019-12-01
getSymbols("SPY",from = '2019-01-01', to = '2019-12-31',warnings=FALSE,auto.assign=TRUE)
SPY=SPY[,"SPY.Adjusted"]
SPY_Return<-Return.calculate(SPY,method=c("log"))
sum(SPY_Return$SPY.Adjusted[-1,])

Annualized SP500 Return from daily average return is 26.83%

 Aggregate Risk Free Rate in Calendar Year 2019 is 2.12%. Taken from Fama French Dataset.

Accenture CAPM Return = 2.12% + 1.11*(26.83%-2.12%) = 29.54%

Fama-French Model (FFM) Return:

//Download Fama-French Factor. The percentage values were converted to decimal values by dividing
by 100 in the excel itself.

FFM<-read.csv("F:/WQU/Course 2-Econometrics/fama_factors_2019.csv")

//Create dataset before regression

ACN_X<-as.data.frame(as.numeric(ACN_Return$ACN.Adjusted))

FFM_ACN<-cbind(ACN_X,FFM[-252,])[-1,]

//Get ACN Equity Excess Return

FFM_ACN["ACN_Excess"]<-FFM_ACN[,1]-FFM_ACN[,6]

//Run Regression on Fama French Model

Reg_FFM_ACN=lm(ACN_Excess~Mkt.RF + SMB + HML,data=FFM_ACN)


//Run Regression on CAPM Model

Reg_CAPM_ACN=lm(ACN_Excess~Mkt.RF ,data=FFM_ACN)

Annualized Returns FFM:


% Returns
SMB -5.19%
HML -9.74%
Risk Free 2.12%
Mkt-RF 24.83%
Parameter FFM CAPM
Beta (Regression) Mkt-Rf: 0.96 Beta: 0.93
SMB:-0.39
HML:-0.39
Beta Significance All Betas are Statistically Beta is Statistically Significant
Significant
Alpha (Regression) 0.0003 0.0006
Alpha Significance Not Significant Not Significant
Adj R-Square 59% 52%
F-Statistics Significant Significant
Accenture Return = > 2.12%+0.96*24.83%+ 2.135% + 1.11*(26.83%-2.135%)
(-0.39*-5.19%)+(-9.74%*-0.39) = 29.54%
= 31.78%
Actual Alpha = 41.68% - 31.78% = 9.9% = 41.68% - 29.54% = 12.14%

Comparison:

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