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The Construction and Application of Hybrid Factor ModelTao, Yun-jhen 28 July 2010 (has links)
A Multifactor model is used to explain asset return and risk and its explanatory power depends on common factors that the model uses. Researchers strive to find reasonable factors to enhance multifactor model¡¦s efficiency. However, there are still some unknown factors to be discovered. Miller (2006) presents a general concept and structure of hybrid factor model. The study follows the idea of Miller (2006) and aims to build a complete flow of constructing hybrid factor model that is based on fundamental factor model and statistical factor models. We also apply the hybrid factor model to the Taiwan stock market.
We assume that a fundamental factor model is already developed and therefore this study focuses on building the second stage, statistical factor model. Principal Component Analysis is used to form statistical factor and spectral decomposition is used to prepare data for principal component analysis. Those methods are applied to stocks on the Taiwan Stock Exchange in the period of January 1, 2000 to December 31, 2009. This study presents a complete construction flow of hybrid factor models and further confirms that a hybrid factor model is able to find missing factors in a developing market such as Taiwan¡¦s stock market. The study also discovers that the missing factors might be market factor and extensive electronic industry factor.
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