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Factor Models of Asset Returns

ENCYCLOPEDIA OF QUANTITATIVE FINANCE, Rama Cont, ed., Chicester: Wiley, 2010.

10 Pages Posted: 26 Oct 2007 Last revised: 17 Nov 2011

Gregory Connor

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Robert A. Korajczyk

Northwestern University - Kellogg School of Management

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

Connor, Gregory and Korajczyk, Robert A., Factor Models of Asset Returns (May 27, 2009). ENCYCLOPEDIA OF QUANTITATIVE FINANCE, Rama Cont, ed., Chicester: Wiley, 2010.. Available at SSRN: https://ssrn.com/abstract=1024709

Gregory Connor

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 702 955-6407 (Phone)
+44 702 955-7420 (Fax)

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

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