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Korea Equity Model (KRE2) Research Notes
May 2, 2004
Section 1 defines the KRE2 estimation universe. The industry and risk index (style) factors are described in Section 2. In Section 3, the discussion turns to how factor returns are calculated from asset returns and factor exposures. The factor return calculation differs from KRE1 in that it includes (i) a thin industry correction that helps to provide meaningful factor returns even when the number of assets in an industry is relatively small, and (ii) a bounded influence feature that prevents a small group of heavily weighted assets from unduly influencing factor returns. Section 4 describes how forecasts for common factor and asset selection risk (specific risk) are constructed. Section 5 reviews model performance in a variety of tests, and compares KRE2 risk forecasts with those of KRE1/
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