Friday, 28 April 2017

Return-Generating Models

A return generating model is a model that is used to forecast the return on a security given certain parameters.

A multi-factor model uses more than one variable to estimate returns.

  • Macroeconomic factor models use economic factors (e.g., economic growth rates, interest rates and inflation rates) that correlate with security returns to estimate returns.
  • Fundamental factor models use relationships between security returns and underlying fundamentals (e.g., earnings growth and cash flow growth) to estimate returns.
  • Statistical factor models use historical and cross-sectional returns data to identify factors that explain returns and use an asset's sensitivity to those factors to project future returns.  

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