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Multiple factor models for equities: An empirical study of the performance of factor mimicking portfolios
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
Umeå University, Faculty of Science and Technology, Department of Mathematics and Mathematical Statistics.
2017 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The trade-off between risk and return for equities has long been a challenge for portfolio and risk managers in order to create financial success and stability. This issue has led to several researchers trying to explain equity returns through various factor models. The capital asset-pricing model (CAPM) formulated by Sharpe (1964), Lintner (1965), and Black (1972) was the first model explaining the relation between cross-sectional returns relative the broad market index. Since then, factor models have evolved and fundamental multiple factor models have been found to successfully explain the risk structure of equities, through linear combinations of firm specific data and market data.

In this paper, we implement and analyze a fundamental factor model. The objective is to build a dynamic and robust model that provide portfolio and risk managers with insight of what drives returns and risks of equities and portfolios. A key to understand the advantages of factor models lies in the characteristics of factors and the concept of factor mimicking portfolios, whose return perfectly replicates those of factors. These portfolios are derived through cross-sectional regressions of security returns and standardized exposure towards factors, which results in portfolios with a desired exposure. The model implementation is applied and evaluated for both a European and Swedish estimation universe, and the result indicate that some factor mimicking portfolios yield an excess return relative the market during 2015-01-01 to 2017-01-01. 

Place, publisher, year, edition, pages
2017. , 46 p.
National Category
Mathematics
Identifiers
URN: urn:nbn:se:umu:diva-136506OAI: oai:DiVA.org:umu-136506DiVA: diva2:1111743
External cooperation
Nordea Markets
Educational program
Master of Science in Engineering and Management
Presentation
2017-06-01, MA356, Umeå universitet 901 87, Umeå, 14:15 (Swedish)
Supervisors
Examiners
Available from: 2017-06-20 Created: 2017-06-19 Last updated: 2017-06-20Bibliographically approved

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Forssén, ChristofferÅhs, Gustav
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CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf