Factor Modelling for Investment Management

Factor models and factor-based investing are changing the way institutional investment managers construct portfolios and analyze risk.

This hands-on program explores key techniques and practical challenges when working with factor models in investment management; as well as reviewing how factor models enable better portfolio risk assessments. Economic as well as statistical aspects will be covered in a balanced manner.

The course features practical applications of all concepts discussed, using Excel models with relevant real-world data.

• Quantitative Analysts
• Risk Managers
• Portfolio Managers
• Investment Consultants
• Financial Economist

• Understand quantitative approaches used in factor modeling today
• Develop basic factor models for equity, fixed income and multi-asset class portfolios
• Use factor models in performance & risk analysis as well as asset allocation

• Basic understanding of Modern Portfolio Theory (MPT) and statistics
• Good familiarity with Microsoft Excel

Background

• Overview factor research and applications: from the CAPM to "Smart Beta"
• Factor models: fundamental, macroeconomic, statistical, and hybrid
• Commercial versus custom factor models

Statistical Foundations

• Linear regression models: assumptions, estimation, analytics (R^2, t-stats, F-test, DW)
• Cross-section versus time-series regressions in finance
• Overview advanced regression techniques: non-linear variables, dummy variables, non-linear estimation techniques, time-variable regression parameters

Workshop: Style analysis of a hedge fund

• Big Data & Data Mining: introduction to LASSO
• Limits to quantitative analysis: system complexity, data issues, stability, out-of-sample performance

Workshop: Identifying hedge fund performance factors

Statistical Factor Models

• Understanding principal component analysis (PCA)

Workshops: Inferring the factor structure from single stocks, modeling yield curve dynamics, and identifying extreme scenarios for stress testing purposes

• Beyond PCA: Introduction to independent component analysis (ICA)

Fundamental Factor Modeling

• Asset pricing and fundamental factors, factor-mimicking portfolios

Workshops: Building a fundamental factor model for an equity portfolio, modeling the momentum factor

Macroeconomic Factor Modeling

• Real and monetary macroeconomic factors and transmission mechanisms

Workshop: Building a macroeconomic model for a multi-asset class portfolio, extracting factors from macroeconomic data

Applications of Factor Models

• Performance Analysis
  • Return contributions from factors
  • True alphas & hidden factor exposures

Workshop: Factor performance attribution

• Risk Management
  • Ex-ante absolute and relative portfolio risk decomposition

Workshop: Factor attribution of absolute and relative portfolio risk

Conclusions and Outlook