Here I explain how to make sense of the econometric factor model widget.
The post explains the Econometric Factor Model widget that I have built. The factors used in the econometric factor model are: unemployment, consumer sentiment, market, size and value/growth. A brief explanation of the factors are as follows.
As a use case, let us try a few examples and see if it makes sense. The following table is based on the factor model run using 5 years of historical returns as of 09-30-2014.
United States Steel Corporation (X), Delta Airlines (DAL), and MicroSoft (MSFT) have negative exposure to unemployment, meaning increase in unemployment (or a detiorating economy) hurts the returns of this company. Mc Donalds (MCD) has a positive exposure to unemployment, in a hurting economy MCD has a better business.
Delta Airlines has the most significant exposure to the consumer sentiment factor. This makes sense because travel industry benefits from a positive consumer sentiment.
The companies on the higher end of the large cap spectrum have a negative exposure to the size factor. The strong positive exposure of DAL to size is a little puzzling, and its history of mergers with Northwest might explain. This is also highlights that factor models do need more than intuition sometimes to make sense and make correct use of.