Factor Model Monte Carlo

Discussion on Practical Financial Econometrics
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mpt
Posts: 3
Joined: Wed Sep 12, 2012 12:14 pm

Factor Model Monte Carlo

Postby mpt » Wed Jan 30, 2013 4:59 pm

Hi Carol,

Do you have any views on the use of Factor Models with Monte Carlo? Thanks

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: Factor Model Monte Carlo

Postby coalexander » Sat Feb 02, 2013 1:19 pm

Hi,

Yes, they are a good way to reduce dimensions when large dimensions is an issue which slows down Monte Carlo. However, many people forget to respect the assumptions of the Factor Model when they do simulations (e.g. they use PCA which is based on correlations, but then use copulas for simulations)

Cheers, Carol


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