The factor models are econometric-based models that aims to measures the effect of different risk measures on portfolio asset returns.
Such models are of three kinds:
- Macroeconomic factor models: models that attempt to measure the effect of macroeconomic variables on asset returns using macroeconomic variables as the change in the interest rates, unemployment rate, inflation rate,...;
- Statistical factor models: models that attempt to explain the risks particular to an investment;
- Fundamental factor models: models that attempt to measure the risks relative to a particular industry or market that might influence the asset portfolio returns;