Python for Finance Cookbook

Implementing the Fama-French three-factor model in Python

In their famous paper, Fama and French expanded the CAPM model by adding two additional factors explaining the excess returns of an asset or portfolio. The factors they considered are:

• The market factor (MKT): It measures the excess return of the market, analogical to the one in the CAPM.
• The size factor, SMB (Small Minus Big): It measures the excess return of stocks with a small market cap over those with a large market cap.
• The value factor, HML (High Minus Low): It measures the excess return of value stocks over growth stocks. Value stocks have a high book-to-market ratio, while the growth stocks are characterized by a low ratio.

The model can be represented as follows:

Or in ...