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Multifactor Risk Models and Heterotic CAPM

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  • Zura Kakushadze
  • Willie Yu

Abstract

We give a complete algorithm and source code for constructing general multifactor risk models (for equities) via any combination of style factors, principal components (betas) and/or industry factors. For short horizons we employ the Russian-doll risk model construction to obtain a nonsingular factor covariance matrix. This generalizes the heterotic risk model construction to include arbitrary non-industry risk factors as well as industry risk factors with generic "weights". The aim of sharing our proprietary know-how with the investment community is to encourage organic risk model building. The presentation is intended to be essentially self-contained and pedagogical. So, stop wasting money and complaining, start building risk models and enjoy!

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  • Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    • Handle: RePEc:arx:papers:1602.04902
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    Cited by:

    1. Zura Kakushadze & Willie Yu, 2017. "How to combine a billion alphas," Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 64-80, January.
    2. Zura Kakushadze & Willie Yu, 2017. "Dead Alphas as Risk Factors," Papers 1709.06641, arXiv.org.
    3. Zura Kakushadze & Willie Yu, 2016. "Statistical Industry Classification," Papers 1607.04883, arXiv.org, revised Dec 2018.
    4. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Data, MDPI, vol. 2(2), pages 1-77, June.
    5. Zura Kakushadze & Willie Yu, 2017. "Decoding Stock Market with Quant Alphas," Papers 1708.02984, arXiv.org.
    6. Zura Kakushadze & Willie Yu, 2017. "Open Source Fundamental Industry Classification," Papers 1706.04210, arXiv.org, revised Dec 2017.
    7. Zura Kakushadze & Willie Yu, 2018. "Dead alphas as risk factors," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 110-115, March.
    8. Zura Kakushadze & Willie Yu, 2021. "ETF Risk Models," Papers 2110.07138, arXiv.org.
    9. Zura Kakushadze & Willie Yu, 2016. "Factor Models for Cancer Signatures," Papers 1604.08743, arXiv.org, revised Jan 2017.
    10. Zura Kakushadze & Willie Yu, 2018. "Decoding stock market with quant alphas," Journal of Asset Management, Palgrave Macmillan, vol. 19(1), pages 38-48, January.
    11. Zura Kakushadze & Willie Yu, 2017. "*K-means and Cluster Models for Cancer Signatures," Papers 1703.00703, arXiv.org, revised Jul 2017.
    12. Zura Kakushadze & Willie Yu, 2019. "Machine Learning Risk Models," Papers 1903.06334, arXiv.org, revised Apr 2019.
    13. Zura Kakushadze, 2020. "Quant Bust 2020," Papers 2006.05632, arXiv.org.
    14. Zura Kakushadze & Willie Yu, 2017. "Notes on Fano Ratio and Portfolio Optimization," Papers 1711.10640, arXiv.org, revised Apr 2018.
    15. Zura Kakushadze & Willie Yu, 2016. "Statistical Risk Models," Papers 1602.08070, arXiv.org, revised Jan 2017.
    16. Kakushadze, Zura & Yu, Willie, 2016. "Factor models for cancer signatures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 527-559.
    17. Zura Kakushadze & Willie Yu, 2018. "Betas, Benchmarks and Beating the Market," Papers 1807.09919, arXiv.org.

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