Tuesday, August 02, 2011

How to use the Fama French Model | Empirical Finance Blog

WOW. Simply the best CAPM and Fama French discussion I may have ever seen. Will DEFINITELY be used in several of my classes this coming year....

How to use the Fama French Model | Empirical Finance Blog:

Super short version:

Even though CAMP does not work, many (most still use it) with some bad results. Why? One reason may be that few people understand other models. Thus Wes Gray (the mastermind behind the Empirical Finance Blog) goes on to explain the Fama French model, link to Sharpe's page for data, and then gives spreadsheet examples of how to use it. Simply great job!

A few look in's:

"The CAPM is prolific, but doesn’t appear to work"

and then after showing it does not work

"Given such a poor track record, is anyone still using the CAPM?

Lot’s of people, apparently…

Welch (2008) finds that ~75% of professors recommend the use of the model when estimating the cost of capital, and Graham and Harvey (2001) find that ~74% of CFOs use the CAPM in their work."

and finally:

"The key lesson is that one shouldn’t be asking whether or not their active manager can outperform the market, rather, they should be asking, given my active manager’s exposures to the market, size, and value, can he beat alternative products in the marketplace that charge ‘index’ fees and not ‘active’ fees."

GREAT job Wes!

HT to MoneyScience

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