factor-models

Factor models such as Fama-French or the other ones that are partially summarized here work on the cross-section of asset returns. How are the factors built, how are sensitivities/coefficients estimated? In this context Fama-MacBeth regressions are usually mentioned. How does this method work intuitively? Could anyone give a step-by-step manual? EDIT: Links to papers and manuals have been posted…

The following paper (and the references given within) focuses on the practical aspects of implementation of factor-based investing and gives an overarching framework for the more technical answers here: Practical Considerations for Factor-Based Asset Allocation by Kang, X. (Standard & Poor's), Ung, D. (Chartered Alternative Investment Analyst Association (CAIA); Global Association of Risk Profess…

Time Series Factor modelling is a very good and practical manual to building time series factor models. FactorAnalytics is a very good R package that allows you to fit timeseries, fundamental and statistical factor models. A good reference to factor models would be Chapter 15 of this book.

1. Determine Factors Economically, the use of factor models can be either motivated using the ICAPM or the APT . Although there are some theoretical differences between the model, for empirical and practical work these differences are irrelevant. In the end, both models stipulate that returns and expected returns are linear functions of the factors: $$ r_{i,t} = \alpha_i + \sum_j \beta_{i,j} F_{j…

A comprehensive tutorial on factor engineering, signal processing, and performance attribution for quantitative trading. Master the Fundamental Law of Active Management, implementation shortfall, and the reality of backtest overfitting. 📊 Deep Research Topics: quantitative finance, investment analysis, financial education, financial research, market analysis

Master the architecture of modern factor models. Transition from asset-class silos to a surgical, multidimensional understanding of risk drivers. From the Factor Zoo to Generative AI Factors, explore the systematic decomposition of market risk. 📊 Deep Research Topics: quantitative finance, investment analysis, financial education, financial research, market analysis

A follow-up extract from my forthcoming book, Equity Analytics The post Applying Factor Models in Pairs Trading appeared first on QUANTITATIVE RESEARCH AND TRADING .

Deutsche Borse Group subsidiary named Category Winner in Factor Modeling and Portfolio Optimization by Chartis Research [...]

1. Time-Series Momentum: A Monte-Carlo Approach by Clemens Struck (University College Dublin) and Enoch Cheng (University of Colorado at Denver – Department of Economics) During my days as an undergraduate student, my professors showed me a set of very simple trading strategies such as the carry trade. Such strategies are usually referred to as “factor investment”. B…

1. Global Factor Premiums by Guido Baltussen (Erasmus University Rotterdam (EUR)) and Laurens Swinkels (Erasmus University Rotterdam (EUR)) and Pim van Vliet (Robeco Asset Management – Quantitative Investing) This paper shows very strong evidence on the main strategies underlying factor-based investing. Over the years several anomalous, but persistent patterns in returns have been discovered by f…

To be instructive, I always use very few tickers to describe how a method works (and this tutorial is no different). Most of the time is spent on methods that we can easily scale up. Even if exemplified using only say 3 tickers, a more realistic 100 or 500 is not an obstacle. But, is...

This is a summary of links featured on Quantocracy on Friday, 08/07/2015. To see our most recent links, visit the Quant Mashup. Read on readers! - Battle Of New Factor Models [Larry Swedroe]In their groundbreaking paper, Digesting Anomalies: An Investment Approach, Kewei Hou, Chen Xue and Lu Zhang proposed a new four-factor asset pricing model that goes a long way toward explaining many of the an…

Thoughtful comments from a reader John S. from the UK on his experience with trading technology and models: "I have been developing my own personal automatic trading systems using Excel VBA and based on rules I have developed over the years as an active private trader investor using both technical and fundamental data analysis. One of the key merits in adopting an automatic trading system approac…

I wrote about how hedge fund returns can be replicated with simple factor models. I just learn that IndexIQ, a company in Rye Brook, NY, has just launched such products available to retail investors as managed accounts.

It has become apparent to me in the last month that there has been a massive transfer of wealth from the gigantic hedge funds running factor models to many day-traders with accounts less than $10M. I call this the Robin Hood regime ( regime being a common technical term referring to a particular trading environment, as in "this is a mean-reverting regime "). Many, many day-traders that I heard fr…

Some of you may remember that I preached about the uselessness of factor models in predicting short term return, and the unreliability of many exotic factors even for the long term. In particular, factor models are especially inaccurate in valuing growth stocks (i.e. stocks with low book-to-market ratio), as evidenced by such models' poor performance during the internet bubble. This is not surpri…

The Economist magazine just published an article that talked about "synthetic" hedge funds, or replicating hedge fund returns using factor models. The original research cited can be found here . (For those of you who want a primer on factor models, I have written an article on this topic previously.) The seven factors are (are you ready?): 1) excess return on the S&P 500 index; 2) a small minus b…

A reader JR just posted some very thoughtful comments on my article on factor models. You can read his comments and my reply here .

Besides pair-trading, “factor model” is the most popular workhorse of the statistical arbitrageur. In a previous article , I discussed the most well-known factor model – the Fama-French Three-Factor model, with the general market index returns, the market-cap of the stock, and the book-to-price ratio as the only three factors driving returns. However, as I explained earlier, this factor model has…