Covariance Matrix Estimate
Estimate covariance matrix using a statistical factor model
covarianceMF(beta, stockM2, factorM2)
beta |
(N x k) matrix of factor loadings (i.e. the betas) from a statistical factor model |
stockM2 |
vector of length N of the variance (2nd moment) of the model residuals (i.e. idiosyncratic variance of the stock) |
factorM2 |
(k x k) matrix of the covariance (2nd moment) of the factor realizations from a statistical factor model |
This function estimates an (N x N) covariance matrix from a statistical factor model with k factors, where N is the number of assets.
(N x N) covariance matrix
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