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.
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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.
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