9.2 Macroeconometric Factor Models
For macroeconomic factor models, the factors are observed and we can apply the least-squares method to the MLR model in Eq. (9.4) to perform estimation. The estimate is
from which the estimates of 
and 
are readily available. The residuals of Eq. (9.4) are
Based on the model assumption, the covariance matrix of 
is estimated by
where 
is the (i, i)th element of 
. Furthermore, the R2 of the ith asset of Eq. (9.3) is
where 
denotes the (i, i)th element of the matrix ...
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