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Using CAPM and Fama–French Models to Analyze Derivatives

Article Quant Q&A · Author: harry_cool
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Summary

The document asks whether CAPM or the Fama–French model can be applied directly to futures and options, drawing a comparison with their use in analyzing stocks. The answer distinguishes studying an underlying asset from analyzing a derivative contract. These models are generally used to explain stock returns, so they may be applied to a stock that underlies a derivative, but that does not by itself provide a complete analysis of the futures or option.

No derivative-specific estimation procedure, empirical results, or worked example is supplied. The central caveat is that conclusions about an underlying’s factor exposures do not capture all features that can affect derivative outcomes. The brief exchange does not specify which additional variables or valuation framework would be appropriate, so it serves as a scope clarification rather than a full method for derivative analysis.

Key ideas

  • CAPM and Fama–French models are primarily used to analyze stock returns.
  • The models may be applied to a stock underlying a future or option.
  • Analyzing the underlying alone does not constitute a complete analysis of its derivatives.
  • The document gives no derivative-specific model or empirical method.

Tags

OptionsFuturesFactor investing
Full text
# How do we analyse the future and option market on the base of the Fama-French model?


# How do we analyse the future and option market on the base of the Fama-French model?












How do we analyse the future and option market on the base of the Fama-French model? Basically i want to know can we analyse derivative market on base of FAMA French or CAPM model ?

e.g for stock we can analyse the stock trend by using Fama french model(by calculating beta and alpha).

## Answer by Bob Jansen (score 4)

https://quant.stackexchange.com/a/65783

One generally doesn't. The CAPM and by extension the Fama French (FF) model are used to analyse stocks.

Of course, you can use these models on the underlying of futures or options if these happen to be stocks but they aren't used directly and such an analysis of the derivatives would be incomplete if you just look at the outcomes of your CAPM or FF model.

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.