Research assignment
FINM4106 / 8006 Advanced Investments
Semester 2, 2025
Part 1: empirical analysis
The purpose of the first part of the project is to extend Fama and French’s (1993) main findings based on the three stock-market factors, namely (i) an overall market factor (excess market return) and factors related to (ii) firm size and (iii) book-to-market equity.
Collect the data provided by Professor Kenneth R. French from the following data source: (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Research). The data library contains the U.S. research returns data, namely monthly “Fama/French 3 Factors” and “25 Portfolios Formed on Size and Book-to-Market (5x5)”.
The project steps are as follows:
1. Read “Common risk factors in the returns on stocks and bonds,” Journal of Financial Economics 33 (1993), 3-56.
2. The variables required for this project (discussed in Sections 2 and 3 of the paper) are as follows:
• The Fama/French factors (Mkt-RF, SMB, and HML) and the risk-free rate (1- month Treasury bill rate, RF);
• 5x5 Portfolios Formed on Size and Book-to-Market.
The 5x5 portfolios are the dependent variables, while the Fama/French factors are the independent variables. You have to merge two datasets.
Use excess stock returns in your estimations.
3. The sample (extension) period: January 1992 to June 2025 (N = 402 months).
4. Using the sample period from January 1992 to June 2025, replicate the regression results reported in Tables 2 (on p.15 only), 4, 5, 6, and 9a. Replicate the results with 5x5 stock portfolios. Do not replicate the results with government and corporate bonds.
5. Using the sample period from January 1992 to June 2025, test for the January effect in the dependent returns, explanatory returns, and residuals from the three-factor regressions (see the test results reported in Table 10, but replicate them with three factors only). Test for 5x5 stock portfolios only.
6. Provide a brief discussion (1-2 paragraphs per question) on the following questions:
• Tables 2, 4, 5, and 6: How do the slope coefficients and R2 estimates change across portfolios and model specifications? Why do they change?
• Table 9a: How do the intercept estimates change across portfolios and model specifications? Why do they change?
• Tables 2, 4, 5, 6, and 9a: Are the estimates consistent in the extension period?
• Table 10: Does the January effect hold in the three-factor regressions? Is it consistent or not across portfolios?
7. Tabulate your estimation results in the same format as reported in the paper
(coefficients, t-statistics, R2, and S(e) ranked on Size and BE/ME quintiles). All estimations have to be run in R or STATA.
Note: The report should be at most 10 pages, including all tables.
Submit your assignment report (Word or PDF) and two R or STATA files, namely a code file and data file, using Turnitin on the course Canvas site. Please ensure I can run all R or STATA commands in your code file and replicate all results in your report. The due date is 10 am on Monday, 29 September 2025.
Part 2: referee report
The purpose of the second part of the project is to write a referee (critique) report on the following paper:
Fama Eugene F. and Kenneth R. French, 1996. “Multifactor explanations of asset pricing anomalies,” Journal of Finance 51, 55-84
The paper is posted on Canvas.
The referee report should be written as if you were the reviewer for the article’s potential publication in a top finance journal. Please keep in mind that rejection rates in the leading journals in finance, such as the Journal of Finance, Journal of Financial Economics, and Review of Financial Studies, are between 90% and 95%, so that, on average, you will give a revise and resubmit at most on every tenth paper you review. So do not be too positive! Your report should clearly state the paper’s important contribution in the best possible light; critique any shortcomings thoughtfully; suggest improvements, if any.
Please ignore that the posted paper has been published in a top finance journal. Instead, suppose the paper is still a working (unpublished) draft, and you must assess it critically.
Please refer to the following web resources to gain more understanding of how to write an effective referee report:
https://afajof.org/wp-content/uploads/files/policies-and- guidelines/JF_Referee_Guidelines.pdf
https://pubs.aeaweb.org/doi/pdf/10.1257/jep.31.1.231
https://www.aeaweb.org/content/file?id=222
The referee report should be at most five pages (12 font). There is no requirement for the number of words.
Submit referee reports (Word or PDF) through Turnitin on the course Canvas site. The due date is 10 am on Monday, 29 September 2025. Submissions must be made on time to be accepted. Students will receive a zero mark for the assignment if submitted after the due date and time.