chapter ten factor models. factor models and return- generating processes n factor models...
Post on 21-Dec-2015
223 Views
Preview:
TRANSCRIPT
FACTOR MODELS AND RETURN-GENERATING PROCESSES FACTOR MODELS
•DEFINITION: a model of a return-generating process that relates returns on securities to the movement of one or more common factors
FACTOR MODELS AND RETURN-GENERATING PROCESSES FACTOR MODELS
•assume returns of two securities are correlated in some way
FACTOR MODELS AND RETURN-GENERATING PROCESSES FACTOR MODELS
•any unexplained aspects of a return are assumed to beuniqueuncorrelated with the unique aspect of
other securities
THE MARKET MODEL
THE MARKET MODEL•is a specific example of a factor model
•the general form may be written
r i = i, I i, I ri, I
where the factor is the market index (I) r i is the i th return in the market
THE MARKET MODEL
TWO IMPORTANT FEATURES OF THE ONE-FACTOR MODEL•THE TANGENCY PORTFOLIO
•DIVERSIFICATION
MULTIPLE-FACTOR MODELS MULTIPLE FACTOR MODELS
•use more than one explanatory variable in the return-generating process
MULTIPLE-FACTOR MODELS MULTIPLE-FACTOR MODELS
•some of these factors may includeTHE GROWTH RATE OF GDP
MULTIPLE-FACTOR MODELS MULTIPLE-FACTOR MODELS
•some of these factors may includeTHE LEVEL OF INTEREST RATES
MULTIPLE-FACTOR MODELS MULTIPLE-FACTOR MODELS
•some of these factors may includeTHE YIELD SPREAD BETWEEN CERTAIN
VARIABLES
MULTIPLE-FACTOR MODELS MULTIPLE-FACTOR MODELS
•some of these factors may includeTHE LEVEL OF OIL PRICES
MULTIPLE-FACTOR MODELS SECTOR-FACTOR MODELS
•Assumption:prices may move together for the same
industry or economic sector
ESTIMATING FACTOR MODELS THREE METHODS
•TIME-SERIES APPROACH
•CROSS-SECTIONAL APPROACH
•FACTOR-ANALYTIC APPROACH
ESTIMATING FACTOR MODELS TIME-SERIES APPROACH
•BEGINNING ASSUMPTIONS: investor knows in advance of the factors
that influence a security's returns
ESTIMATING FACTOR MODELS TIME-SERIES APPROACH
•BEGINNING ASSUMPTIONS: investor knows in advance of the factors
that influence a security's returnsthe information may be gained from an
economic analysis of the firm
ESTIMATING FACTOR MODELS CROSS-SECTIONAL APPROACH
•BEGINNING ASSUMPTIONIdentify Attributes: estimates of a
securities sensitivities to certain factors
ESTIMATING FACTOR MODELS CROSS-SECTIONAL APPROACH
•BEGINNING ASSUMPTIONIdentify Attributes: estimates of a
securities sensitivities to certain factorsestimate attributes in a particular period
of time
ESTIMATING FACTOR MODELS CROSS-SECTIONAL APPROACH
•BEGINNING ASSUMPTIONIdentify Attributes: estimates of a
securities sensitivities to certain factorsestimate attributes in a particular period
of timerepeat over multiple time periods to
estimate the factor’s standard deviations and correlations
ESTIMATING FACTOR MODELS FACTOR-ANALYTIC APPROACH
•BEGINNING ASSUMPTIONS:neither factor values nor securities
attributes are know
ESTIMATING FACTOR MODELS FACTOR-ANALYTIC APPROACH
•BEGINNING ASSUMPTIONS:neither factor values nor securities
attributes are knowuses factor analysis approach
ESTIMATING FACTOR MODELS FACTOR-ANALYTIC APPROACH
•BEGINNING ASSUMPTIONS:neither factor values nor securities
attributes are knowuses factor analysis approachtake the returns over many time periods
from a sample to identify one or more significant factors generating covariances
top related