An Introduction to the Efficient Construction of Intuitive and Transparent Equity Multi-factor Model

In the past 40 years, equity multi-factor models have become an important tool for investment managers to attribute past portfolio performance and assess future potential sources of loss.  A crucial step in developing this class of model is to explain a significant proportion of the variation in the price changes of a large number of securities using a small number of variables.  This article seeks to develop a methodology for effectively and efficiently constructing reasonable equity multi-factor models.

Authors: Bill Wynne and Edward Rackham, Ph.D.