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Write 4 pages with APA style on Factor Models of Asset Returns. The statistical factor models are described as limited in the same way macroeconomic models are limited. that is, they depend on time-se
Write 4 pages with APA style on Factor Models of Asset Returns. The statistical factor models are described as limited in the same way macroeconomic models are limited. that is, they depend on time-series regression to estimate a security's factor beta, the accuracy of which depends heavily on "a long and stable history of returns for a security" (Connor). Fundamental factor models rely on empirical attributes of a company's market elements, such as the size of the firm, its yield and book-to-market ratio, as well as its industry.
Though the fundamental model slightly outperforms the statistical model, and both outperform the macroeconomic model, Connor concludes that the macroeconomic is "probably the strongestof the three approaches" judged by such criteria as intuitive appeal and theoretical consistency. However, he also points out that the different model types are not inconsistent, and that, in fact, "in the absence of estimation error and with no limits on data availability, the three models are simply restatementsof one another" (Connor). He refers to the Fama and French article (discussed below) for their work on finding an approach to explain "how to rotate the fundamental risk attributes to equate some combination of them to the macroeconomic factor betas" (Connor).
