Equity Factor Models - Build one in R with a few lines of codes A step-by-step guide to build your own fundamental factor model using R and cross-sectional regressions Alexander Popov — unsplash Multi-factor models are a must-have for investors looking to understand their portfolio’s performance drivers . It helps explain the actual return of factors such as countries, sectors, and styles, independent of other factors’ effects. In this article, we will focus on the mechanics of such models, and how to code them in R . We also introduce a visualization that lets you visualize the factor performance contributions overtime. A Factor Model, what’s that? A factor model also called a multi-factor model, is a model that employs multiple factors to explain individual securities or a portfolio of securities. It exists at least three types of factor models: Statistical factor models — They use methods similar to principal component analysis (PCA). In these models, b...
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