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1	A Multi-Factor Stock Market Model with Regime-Switches, Student's T Margins, and Copula Dependencies Berberovic, Adnan, Eriksson, Alexander January 2017 (has links) Investors constantly seek information that provides an edge over the market. One of the conventional methods is to find factors which can predict asset returns. In this study we improve the Fama and French Five-Factor model with Regime-Switches, student's t distributions and copula dependencies. We also add price momentum as a sixth factor and add a one-day lag to the factors. The Regime-Switches are obtained from a Hidden Markov Model with conditional Student's t distributions. For the return process we use factor data as input, Student's t distributed residuals, and Student's t copula dependencies. To fit the copulas, we develop a novel approach based on the Expectation-Maximisation algorithm. The results are promising as the quantiles for most of the portfolios show a good fit to the theoretical quantiles. Using a sophisticated Stochastic Programming model, we back-test the predictive power over a 26 year period out-of-sample. Furthermore we analyse the performance of different factors during different market regimes. finance statistics stock market stocks factor factors probability probability distribution students t distrbution students t copula markov chain hidden markov model regime switching stochastic programming optimisation optimization multi factor model arbitrage pricing theory return performance back test expectation maximisation expectation maximization multiple linear regression stochastic process primal-dual interior point qq-plot qq plot excess return market regimes bear market bull market market index index Probability Theory and Statistics Sannolikhetsteori och statistik

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A Multi-Factor Stock Market Model with Regime-Switches, Student's T Margins, and Copula Dependencies