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Factor Modelling for Investment Management

Day One


  • Overview factor research and applications: from the CAPM to "Smart Beta"
  • Factor models: fundamental, macroeconomic, statistical and hybrid
  • Commercial versus custom factor models

Statistical Foundations

  • Linear regression models: assumptions, estimation, analytics (R^2, t-stats, F-test, DW)
  • Cross-section versus time-series regressions in finance
  • Overview advanced regression techniques: non-linear variables, dummy variables, non-linear estimation techniques, time-variable regression parameters

Workshop: Style analysis of a hedge fund

  • Big Data & Data Mining: introduction to LASSO
  • Limits to quantitative analysis: system complexity, data issues, stability, out-of-sample performance

Workshop: Identifying hedge fund performance factors

Statistical Factor Models

  • Understanding principal component analysis (PCA)

Workshops: Inferring the factor structure from single stocks, modelling yield curve dynamics, and identifying extreme scenarios for stress testing purposes

  • Beyond PCA: Introduction to independent component analysis (ICA)

Day Two

Fundamental Factor Modelling

  • Asset pricing and fundamental factors, factor-mimicking portfolios

Workshops: Building a fundamental factor model for an equity portfolio, modelling the momentum factor

Macroeconomic Factor Modelling

  • Real and monetary macroeconomic factors and transmission mechanisms

Workshop: Building a macroeconomic model for a multi-asset class portfolio, extracting factors from macroeconomic data

Applications of Factor Models

  • Performance Analysis
    • Return contributions from factors
    • True alphas & hidden factor exposures

Workshop: Factor performance attribution

  • Risk Management
    • Ex-ante absolute and relative portfolio risk decomposition

Workshop: Factor attribution of absolute and relative portfolio risk

Conclusions and Outlook

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