residuals: Estimate Residuals from Factor Model

In TVMVP: Time-Varying Minimum Variance Portfolio

Estimate Residuals from Factor Model

Description

This function estimates the residuals of asset returns after removing the effect of factor-driven returns.

Usage

residuals(factors, loadings_list, returns)

Arguments

factors	A matrix containing the step-ahead-factors of from the localPCA function.
loadings_list	A list where each element is a matrix of loadings corresponding to the factors for each time period.
returns	A matrix of asset returns with rows representing time periods and columns representing assets.

Details

For each time period t, the function models the asset returns as:

R_t = F_t \Lambda_t + \epsilon_t

where R_t is the vector of asset returns, F_t is the t'th row of the factor matrix, \Lambda_t is the loadings matrix, and \epsilon_t represents the residuals.

The residuals are computed as the difference between actual returns and the modeled returns.

Value

A matrix of residuals where each row corresponds to a time period and each column corresponds to an asset.

TVMVP documentation built on June 28, 2025, 1:08 a.m.