My entry on March 27th showed a regression of 120 months of IBM returns against the Fama French market factor. I was working out the details of getting the data and using Mathematica to do the regression. Now I want to take a closer look at the results. If you are interested in building an economic factor model, you can work out a lot of the methodological details with just one stock. So, continuing to work with the IBM's exposure to Fama French Market Factor, let's look at the stability of the exposure over time. The image below shows a plot of 366 rolling 60-month factor betas, and the corresponding r-squares. Not very stable! However, notice the discontinuities in the r-square plot (enclosed by two red boxes). This strongly suggest that data outliers are causing problems. So, my next step will be to define procedures to identify and deal with outliers.
Look how little Mathematica code it took to do this work (Click on the image below to see the details). I like Mathematica more every day.
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