Renda Variável

Centro de Finanças e Macroeconomia

Stock Market

Factors and Portfolios

Authors: Guilherme Paiva, Guilherme Souza e Igor Martins

This section provides risk factors and portfolios to study Brazilian stocks. We begin with a Brazilian version of Fama-French 5 factors: Market, Book to market, Market capitalization, Operating profitability, and Asset growth (Fama and French 2015). Additionally, we provide factors based on Accounting, Liquidity, Return, and Volatility. We use median value of each characteristic to allocate a stock into a portfolio. Factor is the difference between those two portfolios. Characteristics are based on Green, Hand, and Zhang (2017).

Click here for a complete description and references.

A company is eligible if, in the last 12 months, its ticker:
A) Was traded more than 80% of trading days;
B) Had an average daily volume above 1 million reais;
C) Had a median daily volume above half a million reais;
D) Was listed for at least six months.

We report value-weighted (VW) factors and equally-weighted (EW) factors. We rebalance monthly.

Fama/French 5 factors

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Size (sz): Small minus big (SMB) factor. It is the average return of low market value firms minus average return of high market value firms. A firm is considered small if it is below median market value and big otherwise.

Book-to-market (btm): High minus low (HML) factor. It is the average return of high book-to-market firms minus average return of low book-to-market firms. A firm is considered low if it is below median book-to-market and high otherwise.

Operating Profitability (op_pft): Robust minus weak (RMW). It is the average return of robust operating profitability firms minus average return of weak operating profitability firms. Operating profitability is revenue minus cost of goods sold. A firm is considered weak if it is below median operating profitability and robust otherwise.

Asset growth (aset_gr): Conservative minus aggressive (CMA). It is the average return of conservative investing firms minus average return of aggressive investing firms. Asset growth is annual percentage change in total assets. A firm is considered conservative if it is below median operating profitability and robust otherwise.

Excess Return on the Market (rme): Excess return of the market portfolio. Value-weighted return of all BOVESPA firms listed at the beginning of month, good shares and price data at the beginning of month, and good return data at beggining of month minus one-month DI rate.

Accounting Based Factors

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Book-to-market (btm): High minus low (HML) factor. It is the average return of high book-to-market firms minus average return of low book-to-market firms. A firm is considered low if it is below median book-to-market and high otherwise.

Operating Profitability (op_pft): Robust minus weak (RMW). It is the average return of robust operating profitability firms minus average return of weak operating profitability firms. Operating profitability is revenue minus cost of goods sold. A firm is considered weak if it is below median operating profitability and robust otherwise.

Asset growth (aset_gr): Conservative minus aggressive (CMA). It is the average return of conservative investing firms minus average return of aggressive investing firms. Asset growth is annual percentage change in total assets. A firm is considered conservative if it is below median operating profitability and robust otherwise.

Gross Profitability (gr_pf): It’s the average return of high gross profitability firms minus the average return of low gross profitability firms. A firm is considered to have low gross profitability if is below the median gross profitability and high otherwise. Gross profitability is defined as revenues minus cost of goods sold divided by lagged total assets.

Earnings to price (earn_pr): It’s the average return of high E/P firms minus the average return of low E/P firms. A firm is considered to have low E/P if it is below the median of the E/Ps for all firms and high otherwise.

Sales growth (gr_sl): It’s the average return of high sales growth firms minus the average return of low sales growth firms. A firm is considered to have low sales growth if it is below the median sales growth value of all eligible firms.

Sales to price (sl_pr): It’s the average return of high sales to price firms minus the average return of low sales to price firms. A firm is considered low sales to price if it is below all eligible firms’ median sales to price.

Leverage (levg): It’s the average return of high leverage firms minus the average return of low leverage firms. A firm is considered low leverage if it is below all eligible firms’ median leverage.

Liquidity Based Factors

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Illiquidity (ill_ghz): It is the average return of low liquidity firms minus average return of high liquidity firms. Liquidity is average of daily (absolute return/$ volume). A firm is considered low liquidity if it is below median liquidity and high liquidity otherwise.

Dollar trading volume (d_vol): It is the average return of low dollar trading volume firms minus average return of high dollar trading volume firms. A firm is considered low dollar trading volume if it is below median dollar trading volume and high otherwise.

Volatility of liquidity (std_vol): It is the average return of low volatility liquidity firms minus average return of high volatility liquidity firms. Monthly standard deviation of daily share turnover. A firm is considered low volatility liquidity if it is below median of volatility liquidity and high otherwise.

Return Based Factors

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Momentum – 1Mo (m1): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. 1-month cumulative return.

Momentum – 6Mo (m6): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. 5-month cumulative returns ending one month before month end.

Momentum – 6Mo (m6_1): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. 6-month cumulative returns.

Momentum – 12Mo (m12):  It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. 11-month cumulative returns ending one month before month end.

Momentum – 12Mo (m12_1): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. 12-month cumulative returns.

Momentum – 36Mo (m36): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. Cumulative returns from months t-36 to t-13.

Momentum – 60Mo (m60): It is the average return of high past return firms minus average return of low past returns firms. A firm is considered low if it is below median returns and high otherwise. Cumulative returns from months t-60 to t-13.

Change in 6-month momentum (ch_mom): It is the average return of high past return change firms minus average return of low past return change firms. A firm is considered low if it is below median return change and high otherwise. Cumulative returns from months t-6 to t-1 minus months t-12 to t-7.

Price Delay (pr_delay):  The proportion of variation in weekly returns for 36 months ending in month explained by 4 lags of weekly market returns incremental to contemporaneous market return. It is the average return of low firms minus average return of high firms. A firm is considered low if it is below median ‘Price Delay’ and high otherwise.

Volatility Based Factors

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Idiosyncratic return volatility (i_ret_v): Standard deviation of residuals of weekly returns on weekly equal weighted market returns for 3 years prior to month end. It is the average return on the below median portfolios minus the average return on the above median portfolios.

Return volatility (ret_v): Standard deviation of daily returns from month t-1. It is the average return on the bellow median portfolios minus the average return on the above median portfolios.