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Jan
16
comment Why is Weighted Least Squares necessary in fundamental factor model?
@Richard I agree with you that the definition is rather vague, and it seems as if the $\beta$'s and the factors just swapped roles, but unfortunately my book doesn't give me a more rigorous definition.
Jan
16
comment Why is Weighted Least Squares necessary in fundamental factor model?
@Richard An example would be if you let the first elements of each $\beta$ vector be strongly negative and then let them be increasing so that the last values are strongly positive and the values in the middle are relatively close to $0$: that way you would 'force' the factors to represent the slope of the yield curve for instance (in case we see $R_{it}$ as the yield).
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