Factor Selection

Serge Darolles, Patrick Duvaut and Emmanuelle Jay

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Abstract: This chapter focuses on the empirical ad hoc approach and presents three reference models that are widely used in the literature. These models are all based on the factor representation, but highlight the nature of the factors to be used to explain specific asset class returns. In a section, the authors denote by eigenfactors the factors obtained from the observations using the eigenvector decomposition of the covariance matrix of the returns. The chapter describes some classical techniques, arising from the information theory. It provides complementary sections which provide some light on related problems to this approach such as the estimation of the covariance matrix of the data, the similarity of the approach with subspace methods and the extension of this approach to large panel data.

Keywords: covariance matrix estimation; eigenfactors; empirical ad hoc approach; factor selection; multiple signal characterization (MUSIC) algorithm (search for similar items in EconPapers)
Date: 2013
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Published in Multi-factor models and signal processing techniques: application to quantitative finance, pp.23-58, 2013, ⟨10.1002/9781118577387.ch2⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01632873

DOI: 10.1002/9781118577387.ch2

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