By Edwin Burmeister; Richard Roll; Stephen A. Ross; Edwin J. Elton; Martin J. Gruber; Richard Grinold and Ronald N. Kahn
This monograph provides the paintings of 3 teams of specialists addressing using single-factor versions to provide an explanation for safety returns: Edwin Burmeister, Richard Roll, and Stephen Ross clarify the fundamentals of Arbitrage Pricing conception and talk about the macroeconomic forces which are the underlying assets of threat; Edwin J. Elton and Martin J. Gruber current multi-index types and supply suggestions on their reliability and value; and Richard C. Grinold and Ronald N. Kahn deal with multiple-factor types for portfolio hazard.
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Additional resources for A Practitioner's Guide to Factor Models
The b's (the sensitivities, or factor loadings) could be estimated by regressing the country returns on the two factors. Alternatively, the sensitivities are an output of the analysis. As one would expect, the b's are positive for the North American countries and negative for the European countries on the second index. 74 for A Practitioner's Guide to Factor Models the United States. The two-factor model does an excellent job of explaining returns. A Multi-Index Model of the Japanese Stock Market.
We will discuss four of these: the effect of the choice of data, the number of indexes to use, indeterminacy of the model, and computational diaculties. The Choice of Data. The input to factor or principal component analysis is a sample of security returns. In preparing the return data, the researcher must select both the time period of returns and the sample of stocks (or portfolios of stocks) to use to estimate a factor structure. Ideally, the structure will hold for time periods and securities beyond those used in the estimation sample.
We need estimates of both thefi factors and the factor loadings, bii. Either the fi or the bG can be asserted on a priori grounds with the other identified empirically, or both can be identified empirically. Clearly, estimating one set of parameters should be easier than estimating both sets simultaneously, but we do not do so because we do not know what the correct set is. We can illustrate this problem with the case of the single-index model. Usually, when estimating a single-index model, the index is taken to be the return or excess return (over the riskless rate) on some widely diversified portfolio.
A Practitioner's Guide to Factor Models by Edwin Burmeister; Richard Roll; Stephen A. Ross; Edwin J. Elton; Martin J. Gruber; Richard Grinold and Ronald N. Kahn