A Rank Approach to Equity Forecast Construction

The purpose of this paper is to present a rank based approach to cross-sectionallinear factor modelling. The emphasis is on approximating factor exposures in aconsistent manner in order to facilitate the merging of subjective information(from professional investors) with objective information (from accounting dataand/or state of the art quantitative models) in a statistically rigorous way withoutneeding to impose the unrealistic simplifying assumptions typical of more standardtime series models. We deal with the problems of identifying country and sectorreturns by an innovative hierarchical factor structure. This is all discussed fromthe perspective that investment models are not immutable but rather need to bedesigned with characteristics that are fit for their purpose; for example, returningaggregate county and sector forecasts that are consistent by construction.