To: Dr. Attaullah Shah and to everyone that could help me out with this problem.
I want to run the following regression
Rp,t - Rf,t = αp, F (1 - Dt) + αp, T D+ βp, F (Rm, t - Rf, t) + βp, D (Rm, t - Rf, t )Dt + ep, t
For this, I have Rp data, which is the returns on momentum strategy i.e. Winners-Losers portfolio both for formation and testing period with the total of 118 monthly observations in each period. Rf, t and Rm, t are the risk-free rate and the return of the market index, respectively, during the month t; Dt is a dummy variable, equal to 1 during the test period (t > 0) and 0 during the formation period (t<0), allowing us to estimate different intercepts and betas during both periods; αp, F and αp, T are the risk-adjusted abnormal returns, or Jensen’s alpha, for the formation period and test period respectively; βp, F is the systematic risk of the portfolio p during the formation period; βp, D measures the change observed in the systematic risk of portfolio p between the formation period and the test period, so that the beta for the test period is (βp, F + βp, D); and ep, t is the error term.
Now my questions are:
1. As the Winner-Loser portfolio (momentum strategy) returns is monthly Average Cumulative Abnormal Returns, does the Rm in the regression should also be average monthly cumulative? If so, how would I calculate it?
2. Moreover, I have converted the weekly risk free rates to the respective months like the time period which I took is 36 months both for formation and testing. So I convert the weekly risk free rates Rf accordingly with the formula Rf(weekly)*52/12 (for example if I want 1 month Rf). Is this the right way? Or do I need to add the weekly cumulative risk free rates to get the respective monthly Risk free rates Rf? If so, how would I do it in the stata?
3. Now, when I get the monthly Rm and Rf, I need to arrange it according to the dates of the observations in Winner-Loser portfolio (momentum strategy) file.
4. In case of weekly data, do Rm and Rf would change accordingly?
Sir kindly upload the files on dropbox as well. I have uploaded a dataset in case if you need it.
Thanking you in anticipation!
I want to run the following regression
Rp,t - Rf,t = αp, F (1 - Dt) + αp, T D+ βp, F (Rm, t - Rf, t) + βp, D (Rm, t - Rf, t )Dt + ep, t
For this, I have Rp data, which is the returns on momentum strategy i.e. Winners-Losers portfolio both for formation and testing period with the total of 118 monthly observations in each period. Rf, t and Rm, t are the risk-free rate and the return of the market index, respectively, during the month t; Dt is a dummy variable, equal to 1 during the test period (t > 0) and 0 during the formation period (t<0), allowing us to estimate different intercepts and betas during both periods; αp, F and αp, T are the risk-adjusted abnormal returns, or Jensen’s alpha, for the formation period and test period respectively; βp, F is the systematic risk of the portfolio p during the formation period; βp, D measures the change observed in the systematic risk of portfolio p between the formation period and the test period, so that the beta for the test period is (βp, F + βp, D); and ep, t is the error term.
Now my questions are:
1. As the Winner-Loser portfolio (momentum strategy) returns is monthly Average Cumulative Abnormal Returns, does the Rm in the regression should also be average monthly cumulative? If so, how would I calculate it?
2. Moreover, I have converted the weekly risk free rates to the respective months like the time period which I took is 36 months both for formation and testing. So I convert the weekly risk free rates Rf accordingly with the formula Rf(weekly)*52/12 (for example if I want 1 month Rf). Is this the right way? Or do I need to add the weekly cumulative risk free rates to get the respective monthly Risk free rates Rf? If so, how would I do it in the stata?
3. Now, when I get the monthly Rm and Rf, I need to arrange it according to the dates of the observations in Winner-Loser portfolio (momentum strategy) file.
4. In case of weekly data, do Rm and Rf would change accordingly?
Sir kindly upload the files on dropbox as well. I have uploaded a dataset in case if you need it.
Thanking you in anticipation!
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