A Robust Approach to Multi-Factor Regression Analysis

Practitioners widely use asset pricing models such as CAPM or Fama French models to identify relationships between their portfolios and common factors. Moreover, each asset class has some widely-recognized asset pricing model, from equities through commodities to even cryptocurrencies.

However, which model can we use if our portfolio is complex and consists of many asset classes? Which factors should we include and which should we omit? (Especially if we have a database that consists of several hundreds of potential factors). Additionally, we know that equities influence bonds, commodities influence equities and vice versa. Hence the question, what about the cross-asset relationships?

These are the problems and questions we faced when looking for a methodology for our Multi-Factor Analysis report in the Quantpedia Pro platform. This blog post aims to introduce the model, its logic and the method we have decided to use.


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