Statistical factor models

While fundamental risk models are by far the dominant class of models because of the combination of reliability and interpretability that they offer, statistical factor models, are often avoided or ignored by practitioners because of their apparent opacity. This white paper will seek to provide guidance on how a statistical factor risk model can be a valuable tool to enhance the risk analysis of any equity strategy when used as a complement to a fundamental risk model with the same forecast horizon. 

This paper has four sections:

1. A discussion on why fundamental risk models remain the dominant class of risk models for equity investing
2. An overview of statistical factor models and the methodology behind them
3. A case study to illustrate how statistical and fundamental risk models can be complementary and enhance a practitioner’s understanding of portfolio risk and exposure
4. Recommendations on best practices for using fundamental risk models and statistical models together

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