Model Insight - Using Statistical Models to Capture Missing Fundamental Factor Risk - April 2013

Apr 12, 2013

In this Model Insight, we investigate whether statistical models can capture sources of risk that are missing from a fundamental factor model. We also study whether statistical models are more effective at detecting missing factors during periods of market turmoil.  We conclude that the statistical model effectively identified sources of risk that were missing from a fundamental model. Furthermore, we show that the strength of these missing factors peaked during times of market turmoil.