The DeMarche Factor Model

The DeMarche Factor Model estimates a company's exposure to 55 different fundamental, technical, macroeconomic, and industry factors in a cross-section of the U.S. equity market consisting of the 5,000 most liquid companies over the past 25 years. Through use of multivariate regression analysis, each stock is measured on each of the 55 variables and industry as to its sensitivity to the market as a whole. These exposures or sensitivities to the market as a whole are then combined with historical payoffs (or contributing values to the stock's returns) for each of the 55 factors and industry to calculate the stock's current expected return. Each month, the DeMarche Factor Model ranks stocks from high to low in terms of expected returns relative to the overall market. The main sources for expected return generally emanate from the six factor groups illustrated below.

In addition to the exposures and payoffs which form current expected returns, the DeMarche Factor Model applies decay rates, or measures of tendency for factor exposures to mean-revert over time. In a competitive world, it is difficult for companies to remain superior (or inferior) for very long periods of time, and the tendency for most companies to become more average on various factors is captured in the decay rate mechanism. Factor decay rates are an integral feature of the Factor Model's forecasting capability and are calculated by tracking the tendencies for large numbers of companies with certain characteristics to revert to the mean over time. The chart below illustrates the relatively rapid decay in typical exposure to return on equity (ROE) compared with the slower decay rate associated with cap size.