European Small-Cap Stocks: France, Germany, the Netherlands, and Switzerland
This chapter focuses on the evolution and implementation of analytic and formulaic quantitative multifactor models currently in use by world's equity community. Multifactor risk models have strong intuitive appeal relative to the classic, single-factor Capital Asset Pricing Model. Between 1975 and 1989, however, floodgates opened and multifactor risk models gradually gained acceptance in the institutional equity community. The first, most intuitively pleasing, and most widely used of the multifactor risk models is the BARRA E-model series. Three other significant multifactor equity risk models discussed in the chapter are the Roll-Ross APT model, the APTI, and the Salomon Brothers Risk Attribution Measurement (RAM) model. The Advanced Portfolio Technologies, Incorporated (APTI) methodology is significantly more empirical in its factor specification and construction methodology than the Roll and Ross model. This model, developed by Dr. John Blin and Steven Bender, uses the purest possible form of factor analysis, employing a methodology called VARIMAX rotation, to let the data determine orthogonal, linearly independent factors.