Could someone confirm whether i am understanding the difference between BARRA factor models and Fama/French factor models correctly?
BARRA : cross sectional regression of excess stock returns on stock specific fundamental variables ( such as P/E,P/B,etc) for each time period.
Fama/French : time series regression of excess returns on zero-investment portfolio returns for each asset. (where the zero-investment portfolio is constructed by ranking stocks according to some fundamental variable (e.g. size), creating equally weighted portfolios from the top X% ( bottom X%) of ranked stocks, and subtracting the returns of one portfolio from the other.)
Re BARRA. The first part of your statement seems correct. However, i doubt your meaning of “fundamental variables”. As the description goes these are “The factors of this new model are simply all the local market factors.” (page 4, Section 2.2). I think these risk factors cannot be P/E, etc. Then, it goes in Section 2.3 - “…since there are a large number of local equity factors…”. And, they continue further explaining GLOBAL market factors like this “…For example, part of the return to the local US and UK oil factors is due to an underlying global oil factor, which captures global oil prices, cartel activity, etc…”
and they say about “factors” - “the Fama French model claims that all market returns can roughly be explained by three factors: 1) exposure to the broad market (mkt-rf), 2) exposure to value stocks (HML), and 3) exposure to small stocks (SMB).” A huge database is here
If you follow the link you’ll find a description of the factors - click the link and read the text. “The Fama/French factors are constructed using the 6 value-weight portfolios formed on size and book-to-market. (See the description of the 6 size/book-to-market portfolios.)” and so on. Thus, in my opinion your statement re the model is incorrect.
It seems that i was correct…the BARRA model you linked me to seems to be some integrated model (with global/local factors) but is essentially a subset of the BARRA specification contained in the uni-washington handout.
I am aware of the fama/french data library.The 6 size/book-to-market portfolio you alluded to is only the first step in the factor construction process. It is one step shy of the zero investment portfolio. The factors in the Fama/French factor model are given directly here