Definitions for "Factor model"
A model that assumes a linear relation between an asset's expected return and 1 or more systematic risk factors.
an empirical model where each of the variables is represented by a quantified factor, and then the factors are combined, for example by adding them up or by multiplying them
A method of modeling equity price behavior by reference to factors that affect equity prices. The expected return of an equity is assumed to be the sum of its sensitivities to various factors that influence prices. The CAPM is a single factor model, analyzing equity prices by reference to the behavior of equities generally (i.e., solely in terms of their beta). Multi-factor models may either seek to find real world macroeconomic influences (such as interest rates or oil prices), or may regress equity prices against each other to find significant clusters of correlation. Factor models are widely used in the construction and trading of OTC derivatives, basket trading and other arbitrage activities.