Connor, Gregory
(1995)
The Three Types of Factor Models: A
Comparison of Their Explanatory Power.
Financial Analysts Journal, 50.
pp. 42-46.
ISSN 0015-198X
Abstract
With some blurring at the boundaries, multifactor
models of asset returns can be divided
into three types: macroeconomic, statistical, and
fundamental. Our empirical findings confirm the
conventional wisdom that statistical factor models
and fundamental factor models outperform macroeconomic
factor models in tenns of explanatory
power. The findings also indicate that the fundamental
factor model slightly outperforms the statistical
factor model. This result is at first surprising,
because statistical factor models are estimated
by maximizing explanatory power. So, how can an
alternative outperform them by this criterion? The
explanation lies in the much larger number of
external data sources used in fundamental factor
models, particularly the large set of industry dummies.
Another empirical finding is that the marginal
explanatory power of a macroeconomic factor
model is zero when it is added to the fundamental
factor model. This result may indicate that the
fundamental factors {in some unknown combination)
capture the same risk characteristics as the
macroeconomic factors.
| Item Type: |
Article
|
| Keywords: |
Factor Models;
Comparison; Explanatory; Power; |
| Academic Unit: |
Faculty of Social Sciences > Economics, Finance and Accounting |
| Item ID: |
8436 |
| Depositing User: |
Gregory Connor
|
| Date Deposited: |
11 Jul 2017 16:32 |
| Journal or Publication Title: |
Financial Analysts Journal |
| Publisher: |
CFA Institute |
| Refereed: |
Yes |
| URI: |
|
| Use Licence: |
This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available
here |
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