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Factor Selection

Author

Listed:
  • Serge Darolles

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Patrick Duvaut
  • Emmanuelle Jay

Abstract

This chapter focuses on the empirical ad hoc approach and presents three reference models that are widely used in the literature. These models are all based on the factor representation, but highlight the nature of the factors to be used to explain specific asset class returns. In a section, the authors denote by eigenfactors the factors obtained from the observations using the eigenvector decomposition of the covariance matrix of the returns. The chapter describes some classical techniques, arising from the information theory. It provides complementary sections which provide some light on related problems to this approach such as the estimation of the covariance matrix of the data, the similarity of the approach with subspace methods and the extension of this approach to large panel data.

Suggested Citation

  • Serge Darolles & Patrick Duvaut & Emmanuelle Jay, 2013. "Factor Selection," Post-Print hal-01632873, HAL.
  • Handle: RePEc:hal:journl:hal-01632873
    DOI: 10.1002/9781118577387.ch2
    as

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