Suppose that you are assessing the capital asset pricing model (CAPM) by using cross-sectional regressions. You...

Transcribed Image Text:

Suppose that you are assessing the capital asset pricing model (CAPM) by using cross-sectional regressions. You have the returns on all stocks traded in the NYSE, AMEX and Nasdaq exchanges, the correspondingly estimated market betas, market equity (ME), book-to-market (BM) ratios, operating profitability (OP), investments (INV) and momentum (Mom). Suppose that you apply the cross-sectional regression: r-r₁=Y₁ + y₂ + y ln(ME) +% ln(BM) +YOP+YINV₁+y, Mom, + & You fit the regressions. The regression results are summarized as below and the associated t- statistics are reported in brackets: В In(ME) Cross-sectional regression (1) (2) (3) (4) (5) 0.15 (0.46) -0.15 (-2.58) -0.11 (-1.99) -0.16 (-2.32) -0.18 (-2.78) In(BM) 0.35 (4.44) 0.31 (3.36) 0.32 (3.36) OP 0.27 (2.70) 0.25 (2.77) INV -0.12 (-2.76) -0.10 (-2.73) Mom 0.70 (2.98) a) Discuss what market beta, market equity(ME), book-to-market ratios, operating profitability, investments and momentum are in the Fama-MacBeth cross-sectional regression analysis. (18 marks) b) Do the results summarised in the table support the CAPM, the Fama and French five-factor, and the Carhart-four factor models? Suppose that you are assessing the capital asset pricing model (CAPM) by using cross-sectional regressions. You have the returns on all stocks traded in the NYSE, AMEX and Nasdaq exchanges, the correspondingly estimated market betas, market equity (ME), book-to-market (BM) ratios, operating profitability (OP), investments (INV) and momentum (Mom). Suppose that you apply the cross-sectional regression: r-r₁=Y₁ + y₂ + y ln(ME) +% ln(BM) +YOP+YINV₁+y, Mom, + & You fit the regressions. The regression results are summarized as below and the associated t- statistics are reported in brackets: В In(ME) Cross-sectional regression (1) (2) (3) (4) (5) 0.15 (0.46) -0.15 (-2.58) -0.11 (-1.99) -0.16 (-2.32) -0.18 (-2.78) In(BM) 0.35 (4.44) 0.31 (3.36) 0.32 (3.36) OP 0.27 (2.70) 0.25 (2.77) INV -0.12 (-2.76) -0.10 (-2.73) Mom 0.70 (2.98) a) Discuss what market beta, market equity(ME), book-to-market ratios, operating profitability, investments and momentum are in the Fama-MacBeth cross-sectional regression analysis. (18 marks) b) Do the results summarised in the table support the CAPM, the Fama and French five-factor, and the Carhart-four factor models?

Answer rating: 100% (QA)

a Market beta is a measure of the sensitivity of a securitys returns to movements in the overa... View the full answer