Performance & Risk Metrics
Three-Factor Model Residual
The unexplained return component after controlling for market risk, size, and value exposures in the Fama-French three-factor framework, representing alpha or manager skill net of systematic factor tilts.
The three-factor model residual isolates true alpha by regressing historical returns against market beta (MKT-RF), size factor (SMB), and value factor (HML). In insider-trading and quant scoring contexts, this metric reveals whether abnormal returns stem from genuine skill, information asymmetry, or systematic factor exposure that may correlate with insider activity cycles. A persistently large positive residual may signal consistent outperformance independent of traditional risk factors, while large negative residuals warrant scrutiny for potential market timing errors or hidden leverage.
In surveillance systems, residual clustering by insider filing date or blackout window lift can indicate whether price movements are driven by factor rebalancing or by material nonpublic information. High-conviction quant signals with large residuals relative to peer funds warrant elevated scrutiny under Rule 10b5-1 and form-4 filing protocols, as they may reflect information leakage ahead of earnings or transaction announcements.
Formula
- ri
- Total return of security or portfolio
- rf
- Risk-free rate
- \betai
- Market beta exposure
- rm
- Market return
- si
- Size factor loading
- hi
- Value factor loading
- \alpha
- Alpha or unexplained outperformance
- \epsiloni
- Idiosyncratic residual term