Factor Models

Read these first

1. 01Arbitrage Pricing Theory

   Instead of assuming everyone holds the market portfolio, this theory asks a weaker question, what expected returns must hold so that no combination of assets creates a free lunch, and gets a multi-factor pricing model out of that question alone.

2. 02Barra-Style Equity Risk Models

   The commercial template nearly every equity risk desk actually runs, style factors like value and momentum plus an industry classification, estimated fresh every day from a huge cross-sectional regression, turned into a full stock-by-stock covariance matrix.

3. 03Estimating the Factor Covariance Matrix

   Factor models shrink a huge stock-by-stock covariance problem down to a small factor-by-factor one, but that small matrix is still noisy, still time-varying, and still needs its own careful, separate estimation before you can trust any risk number built on top of it.

4. 04Fundamental vs Statistical Factor Models

   Two entirely different ways to build a factor model, one where you decide the factors first and let the data supply the exposures, the other where you let the data decide the factors and hope you can name them afterward.

5. 05The Factor Zoo and the Replication Crisis

   Hundreds of "factors" claiming to predict stock returns have been published, more than any economic story can plausibly justify. This is the portfolio-construction side of that problem, what it means for anyone actually building a factor portfolio, not just for the academics arguing about it.

Then the rest

1. 06Unintended Factor Exposures
2. 07Beta Estimation Error
3. 08Beta Shrinkage: Blume and Vasicek
4. 09Characteristic Portfolios
5. 10Conditional and Time-Varying Betas
6. 11Cross-Sectional Factor Return Regressions
7. 12Decomposing Portfolio Risk by Factor
8. 13Determining the Number of Factors
9. 14Estimating Specific (Idiosyncratic) Risk
10. 15Factor Neutralisation
11. 16Factor-Mimicking Portfolios
12. 17Hedging Factor Exposures
13. 18Instrumented Principal Component Analysis
14. 19Macroeconomic Factor Models
15. 20Profitability and Investment Factors
16. 21Pure Factor Portfolios
17. 22Residual Correlation and Missing Factors
18. 23Sector and Country Factors
19. 24Standardising and Winsorising Factor Exposures
20. 25The Bias Statistic for Risk Model Testing
21. 26The Carhart Four-Factor Model
22. 27The Factor Alignment Problem
23. 28The Gibbons-Ross-Shanken Test
24. 29The q-Factor Model
25. 30Validating a Risk Model