Statistical Methods in Finance 2023

December 19 to 23, 2023


                                




Abstract

Liquid Factor Models and Better Exposure Estimation

By Dale W.R. Rosenthal
University of Illinois at Chicago, USA

Abstract
I discuss various types of factor models and propose that liquidly-traded factors may outperform other types of factors. Evidence from other work suggests a small number of such liquid factors. Some of these have possible estimation issues due to multicollinearity. I suggest reformulations of factors and changes to the estimation method to alleviate these issues and reduce hedging costs. Finally, I show how a liquid factor model performs for a few well-known investment funds.