Method
• Pick three industry groups (Chemical, Food, Pharma)
• Consider 40 years of data as a whole and in 10-year increments • Conduct correlation analysis to develop “independent” clusters of the 114 factors for our models
• Settled on 5 independent clusters for now (possibly dependent on industry group, but that’s for later)
• Pick representative factor from each of the 5 clusters
• Perform regression analysis using the 5 factors to model the 3 output quantities one-at-a-time (market cap, fundamental score, price to book ratio). • Actually, for a particular model, e.g., market cap, can also use the other two output quantities as model input factors.
• “Elementary” regression first (to make sure to get things right), then…
• …more -advanced techniques to squeeze out improvements
• Rinse and Repeat for other sectors.
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