Factor Models and Fundamentalism, MSCI Barra Newsletter, Summer 2006

Jun 1, 2006

Guy Miller compares Fundamental, Statistical, and 'Hybrid' Equity Factor Risk models. He discusses when the different types work best and when they are likely to fail in risk management and portfolio construction. When statistical factors are used to extend a fundamental factor model, we see modest improvements in risk forecasting. The improvement in portfolio optimization seems even slighter and should be applied only with caution