Multifactor Risk Models and Heterotic CAPM

Zura Kakushadze and Willie Yu

Papers from arXiv.org

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 presentation is intended to be essentially self-contained and pedagogical. So, stop wasting money and complaining, start building risk models and enjoy!

Date: 2016-02, Revised 2016-03
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (17)

Published in The Journal of Investment Strategies 5(4) (2016) 1-49

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1602.04902

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