Taiwan multi-factor model construction: equity market neutral strategies application

Purpose –With the development of the modern portfolio theory and the advancement of information technology, the employment of quantitative approaches to practically measure asset risks and returns, and the construction of portfolios (even dynamic portfolios) has become possible and popular. Therefore, the purpose of this paper is to construct a multi-factor model for Taiwan stock universe using fundamental technical descriptors and then to apply the equity market neutral investing using multiple-factor models as a tool. Design/methodology/approach - This study constructs a Taiwan equity multi-factor model using cross-sectional fundamental technical approach. Findings - The model involves 28 explanatory factors (including 20 industry factors), and the results of the estimations are satisfactory. The model's explanatory power is 58.6 per cent on average. Furthermore, this multi-factor model is feasible, modulized, dynamic (i.e. modified over time) and updating. Originality/value - The multi-factor model, constructed and utilized in this study, is a useful and feasible tool. It generates important inputs into the applications of building market neutral portfolio.