Fundamental Factor Models: Intercept

[archived_user]

Why is the risk-free rate not used as an intercept in a fundamental factor model?

 

[archived_user]

Do you think that it should be?
If so, why?

 

[archived_user]

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?

 

[archived_user]

avmachado wrote: Isn’t an asset supposed to return at least the risk-free rate?

Supposed to?

avmachado wrote: If we can’t consider RFR, then what is the intuition behind the fundamental factor model?

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.)

 

[archived_user]

rfr in a factor model? Isn’t it because the calculation is the return above the rfr.

 

[archived_user]

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?