Why is the risk-free rate not used as an intercept in a fundamental factor model?
Do you think that it should be?
If so, why?
Isn’t an asset supposed to return at least the risk-free rate?
If we can’t consider RFR, then what is the intuition behind the fundamental factor model?
_ Supposed _ to?
Do you want intuition, or do you want understanding?
The understanding is that it’s impossible for all of the fundamental factor exposures to be zero simultaneously, so the intercept is not a return that would be achieved. (Indeed, for many fundamental factor models, it’s impossible for any of the factor exposures to be zero, ever.)
rfr in a factor model? Isn’t it because the calculation is the return above the rfr.
Alright, thanks for answering me; what I intend to ask is, in practical terms (definitely depending on circumstance), what can be used as an intercept for fundamental factor models?