Factor Models, Diversification and Efficiency
The simultaneous study of several financial or currency series often shows similar evolutions. These can be modelled in two different ways, either introducing underlying series, observable or not, that explain this common evolution or identifying approximated relations satisfied by the series. The first approach leads to factor models similar to the ones introduced in chapter 6, and the second approach leads to techniques like cointegration and codependence.
KeywordsFactor Model Endogenous Factor Residual Term Factor Representation Arbitrage Opportunity
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