Statistical Models

Multi-factor risk models have been widely used in the investment industry for over 40 years

Fundamental models are by far the dominant class of models because of the combination of reliability and interpretability that they offer, while statistical 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 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 provides: 

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

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