Consider the monthly value-weighted SMALL-LoBM portfolio returns of Fama-French data, denoted by xt. See the web:

mba.tuck.dartmonth.edu/pages/faculty/ken.french/data_library.html. Also, consider the monthly Fama-French three factors, also available from the same web. Denote the factors by Mrk.RF, SMB, and HML, respectively.

The data span is from July 1926 to July 2017 for 1903 observations. See also the files FF_ Factors.csv and FF_ 6_Portfolios.csv.

(a) Fit the linear regression model:
Write down the model and perform model checking.

(b) Fit a two-state Markov switching model to the data and write down the fitted model.

(c) Compare the two fitted models in

(a) and (b).

Transcribed Image Text:

x = Po + BMrk.RF, + B2SMB + B3HML+ + . 1