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Choosing UK Equity Data for Fama–French and q-Factor Research

Article Quant Q&A · Author: Yassine Zaïbi
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Summary

The note outlines a process for building a UK equity sample for Fama–French five-factor or q-factor asset-pricing research. It favors Worldscope UK over combining the active UK securities list with the dead-stock list because accounting data is more available in early years and the database includes delisted firms, helping reduce survivorship bias. The proposed filters retain British equities with a main London listing and exclude financial firms.

It describes using Datastream total returns for returns, market value as a size proxy, assets less liabilities for book equity, and gross profits and revenue for profitability-related measures. EBIT is used as an operating-income proxy because interest-expense coverage is weak, even though this differs from the Fama–French definition. A three-month Treasury bill return serves as the risk-free rate because the one-month series begins later in the sample. The note also flags that the total-return index may remain stuck after administration and suggests an alternative price-adjusted series. These are sample-specific data choices, not a universal factor construction recipe.

Key ideas

  • Worldscope UK is presented as a source with stronger early accounting coverage and dead stocks, reducing survivorship concerns.
  • The sample filters remove non-equities, non-British firms, non-main London listings, and financial companies.
  • Returns, market value, book equity, gross profits, revenue, and risk-free rates are mapped to database fields or series.
  • EBIT substitutes for operating income less interest expense because interest-expense data coverage is weak.
  • A total-return index may fail to reflect a company’s administration outcome, requiring a price-based adjustment.

Tags

EquitiesFactor investingBacktestingUS markets
Full text
# Which data to use with the Fama French 5 factors model & q factor model


# Which data to use with the Fama French 5 factors model & q factor model












I'm working on my thesis in asset pricing, particularly on 'Fama French 5 factors model & q factor model'. May I know why I have to work with the FBRIT and DEADUK securities list for the UK market and not the Worldscope database (wscopeuk).

## Answer by Tim  (score 2)

https://quant.stackexchange.com/a/31921

I'd recommend you to use the LSPD database which is more comprehensive. However, I once used similar data to test the profitability factor in the UK markets. See the outline below on how to get and filter the data according to Fama &French.

The data comes from the Worldscope UK database [WSCOPEUK], which starts in 1985. I use the Worldscope database instead of all UK stocks [FBRIT] in combination with all the so called ’dead’ stocks [DEADUK] because of the better availability of accounting data in the early years of the sample. At the time of writing the Worldcope UK database consists of 5,359 stocks whereas the a combination of [FBRIT] and [DEADUK] counts 10,329 stocks over the same period. An advantage of the Worldscope database is that it includes dead stocks and therefore is relatively free of survivor-ship bias. Starting with the Worldscope UK database I exclude all non-equities, all non-British stocks, companies not traded in London and those companies of which the provided listing is not their main listing. Further, financial companies, those with SIC codes starting with six, are also excluded (Novy-Marx, 2013). Datastream’s total returns index [RI] is used to gather returns, [MV] as proxy for the market value. Book value of equity is total assets [WC02999] minus total liabilities [WC03351]. Gross profits are defined as [WC01100] and revenue as [WC01001]. Operating income [WC01250] or EBIT represents the difference between sales and total operating expenses.10 In line with Gregory et al. (2013), I use the monthly return on three month Treasury Bills [UKTBTND] as proxy for the risk-free rate since this data is available from January 1985 whereas monthly return on one month Treasury Bills is only available form March 2000. Datastream’s total return index [RI] becomes stuck on the last traded day in the case a company goes into administration, it is not revised to zero. Using [X(RI)*(X(PT)/X(PT] instead of [RI] helps to overcome this obstacle.

Note that this is slightly different from operating income minus interest expense used by Fama and French (2015). They argue that interest expense is a compensation for debt holders since they partly finance the total assets. However, I find that the Worldscope coverage on interest expense [WC01251] for my sample is weak. Hence, I prefer using the straightforward EBIT measure as a proxy for operating income.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.