Standard Article

Factor Models

  1. Gregory Connor1,2,
  2. Robert Korajczyk1,2

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf19003

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Connor, G. and Korajczyk, R. 2010. Factor Models. Encyclopedia of Quantitative Finance. .

Author Information

  1. 1

    National University of Ireland, Maynooth, Ireland

  2. 2

    Northwestern University, Evanston, IL, USA

Publication History

  1. Published Online: 15 MAY 2010

Abstract

Factor models of security returns decompose the random return on each of a cross-section of assets into pervasive components, affecting almost all assets, and a diversifiable component. We describe four alternative approaches to factor modeling of asset returns. We also discuss issues related to estimating factor models and testing for the appropriate number of factors.

Keywords:

  • statistical factor analysis;
  • corporate characteristics;
  • return comovements;
  • beta pricing models;
  • pervasive risk;
  • idiosyncratic risk