Asset Selection Using a Factor Model and Data Envelope Analysis-A Quantile Regression Approach

14 Pages Posted: 25 Aug 2010

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Abhay Kumar Singh

Edith Cowan University

Date Written: March 10, 2010

Abstract

With the growing number of stocks and other financial instruments in the investment market, there is always a need for profitable methods of asset selection. The Fama-French three factor model, makes the problem of asset selection easy, by narrowing down the number of parameters, but the usual technique of Ordinary Least Square (OLS), used for estimation of the coefficients of the three factors suffers from the problem of modelling using the conditional mean of the distribution, as is the case with OLS. In this paper, we use the technique of Data Envelopment Analysis (DEA) applied to the Fama-French Three Factor Model, to choose stocks from Dow Jones Industrial Index. We use a more robust technique called as Quantile Regression to estimate the coefficients for the factor model and show that the assets selected using this regression method form a higher return equally weighted portfolio.

Keywords: Asset Selection, Factor Model, DEA, Quantile Regression

JEL Classification: G11, G12, C21

Suggested Citation

Allen, David Edmund and Singh, Abhay Kumar, Asset Selection Using a Factor Model and Data Envelope Analysis-A Quantile Regression Approach (March 10, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663767 or http://dx.doi.org/10.2139/ssrn.1663767

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Abhay Kumar Singh

Edith Cowan University ( email )

Joondalup Drive
Perth
Joondalup, WA 6027
Australia

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