Download This PaperFactor Models of Asset Returns
ENCYCLOPEDIA OF QUANTITATIVE FINANCE, Rama Cont, ed., Chicester: Wiley, 2010.
10 Pages Posted: 26 Oct 2007 Last revised: 16 Nov 2011
Date Written: May 27, 2009
Abstract
Factor models of security returns decompose the random return on each of a cross-section of assets into pervasive components, affecting almost all assets, and a diversifiable component. We describe four alternative approaches to factor models of asset returns. We also discuss issues related to estimating factor models and testing for the appropriate number of factors.
Keywords: Factor Models, Principal Components, Factor Analysis, Macroeconomic Factors
JEL Classification: G12, C33
Suggested Citation: Suggested Citation
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