Journal of Investment Strategies
ISSN:
2047-1238 (print)
2047-1246 (online)
Editor-in-chief: Ali Hirsa
Need to know
- A complete algorithm and source code for building general multifactor risk models.
- Any combination of style factors, principal components and/or industry factors.
- This generalizes the heterotic risk model construction to include arbitrary factors.
- The presentation is intended to be essentially self-contained and pedagogical.
Abstract
ABSTRACT
We give a complete algorithm and source code for constructing general multifactor risk models (for equities) via any combination of style factors, principal components (betas) and/or industry factors. For short horizons, we employ the Russian-doll risk model construction to obtain a nonsingular factor covariance matrix. This generalizes the heterotic risk model construction to include arbitrary non-industry risk factors as well as industry risk factors with generic "weights". The aim of sharing our proprietary know-how with the investment community is to encourage organic risk model building. The paper is intended to be essentially self-contained and pedagogical.
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