IB9EN0 Group Project UNIVERSITY OF WARWICK MSc Accounting and Finance IB9EN0 FINANCIAL MARKETS
This project requires you to do hands-on empirical analyses using real financial data and to interpret and discuss the results in words. The quality of the interpretation is as much important as the empirical analyses and results. Active group discussion is strongly encouraged as various opinions from different teammates can enrich the report. For the empirical parts, feel free to use any of the computer programs (e.g., Excel, Stata, SAS, Matlab, or even C++) you are familiar with.
Please keep in mind that this task is all open-ended: there is no guarantee that you end up having similar empirical results to what have been documented previously in the literature. As long as you are certain about the analyses, there is no point spending much time trying to replicate the existing results. Just proceed with your findings and try to interpret them by relating them to the concepts learnt in class.
Historical monthly returns of individual stocks
Three Risk Factors
Market-to-Book Ratio (ME/BE)
Historical monthly returns on 49 Industry Portfolios
Based on the sample of 50 stocks for the period from July 1992 to June 2005, answer the following questions (Question 1 to Question 3).
3. Appraise critically the claim of ‘β is dead’ by Fama and French (1992) by examining whether there exist the small firm effect and the value effect.
Using the sample of 49 industry portfolios for the period from July 1992 to June 2005, answer the following question (Question 4).
4. Discuss the relative performance of asset pricing model for the CAPM vs. the FF 3-factor model. You may do this by comparing the out-of-sample forecasting power between the two models.
Black, F., M. C. Jenson, and M. Scholes, 1972, The Capital Asset Pricing Models: Some Empirical Tests, in M. C. Jensen, ed., Studies in the Theory of Capital Markets. Praeger, New York, 79-124. (Web Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=908569)
Fama, E.F. and K. French, On the Cross-Section of Expected Returns, Journal of Finance, 1992, Vol 47, 427466.
Fama, E.F. and K. French, Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 1993, Vol 33, 3-56.
Fama, E.F. and K. French, Size and Book-to-Market Factors in Earnings and Returns, Journal of Finance, 1995, Vol 50, 131-155.
Fama, E.F. and K. French, Multifactor Explanations of Asset Pricing Anomalies, Journal of Finance, 1996, Vol 51, 55-84.
Fama, E.F. and J.D. MacBeth, Risk, Return, and Equilibrium: Empirical Tests, Journal of Political Economy, Vol 81, No 3, 607-636.
J. Lintner, 1965, Security Prices, Risk and Maximal Gains from Diversification, Journal of Finance, Vol 20, No 4, 587-615
Word count: the report should not exceed the word limit of 4,000 (excluding the captions for figures and tables)
Format: The report includes only the answers to each question. That is, the report does not have to follow the typical structure (abstract, introduction, literature review, or conclusion) that proper academic papers would have. However, cite the references properly if used to support the answers.
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