Applied Risk Management for Banking

Instructions:

Login in on Keats.
Click at the following link and download the file dataset_coursework.dta,
Data have been collected from Yahoo Finance. They range from January 1990 to March 2024 with a daily frequency.
In Column 1, we report the "date".
In Column 2, the variable "r_market", is the return of the market portfolio.
In Column 3, the variable "rfr" is the daily return for the Treasury bills, the
risk-free asset.
In Column 4, "hml" is the average return of the stocks in the high market-to- book portfolio minus the return of the stocks in the low book-to-market portfolio.
In Column 5, "smb" is the average return of stocks in a portfolio formed by small market capitalization companies minus the average returns of stocks in the portfolio formed by big market capitalisation companies (see Figure 1).
Data have been collected from the Kenneth French's Data Library website and
the full description of the above variables is available at the following link.
From Column 6 onward, you find the price for about 240 stocks listed in the S&P500.

Choose any one asset.

Question 1

Present and discuss the Capital Asset Pricing Model (CAPM).

Estimate the CAPM model using the data for the asset you have chosen. Report and discuss the results and whether you believe the estimate you have obtained is appropriate.

Present and discuss the Fama and French (1993) three factors model. Estimate the Fama and French (1993) three factors model using the data and discuss the results.

Compare the results for model under question (c) with those from the model under question (a). What is the preferred model, and why? Discuss.

How do you deal with the presence of an important risk event in the data (for example, a financial crisis)? Discuss. Use the data to describe approach you would adopt.