|Original language||English (US)|
|Title of host publication||Encyclopedia of Quantitative Finance|
|Publisher||John Wiley & Sons, Inc.|
|State||Published - 2010|
Factor models of security returns decompose the random return on each of a cross-section of assets into pervasive components, affecting almost all assets, and a diversifiable component. We describe four alternative approaches to factor modeling of asset returns. We also discuss issues related to estimating factor models and testing for the appropriate number of factors.