Interview Question: Significant Factors

Sample Question #99 (financial econometrics)

What are the three types of factor models for studying financial asset returns? Briefly explain each of them.

(Comment: there’s an excellent discussion of factor models and PCA in ch. 9 of Tsay, Analysis of Financial Time Series, 2nd ed.)

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One Response to Interview Question: Significant Factors

  1. Brett says:

    ANSWER
     
    1) Macroeconomic factor models that use macroeconomic variables such as interest rates and commerical trade numbers to describe asset returns.
    2) Fundamental factor models that use microeconomic variables specific to the firms or industries.
    3) Statistical factor models that extract common factors, expressed as statistical series, from asset returns; these factors don’t have any economic interpretations.

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