Simultaneous Market Capitalization and Industry Neutralization of Factors

Summary

The document answers whether a factor can be neutralized for both market capitalization and industry exposure. It recommends including market capitalization as a continuous explanatory variable and industry membership as dummy variables in the same regression, then using the residual as the neutralized factor.

This joint regression accounts for both types of exposure at once. The text contrasts this with sequentially neutralizing for industry and then market capitalization, but gives no comparison of the approaches or empirical results. It also does not specify the regression design, factor construction, return horizon, or weighting scheme, so those choices must be determined for the intended data and research question.

Key ideas

• Market capitalization and industry indicators can be included together as regression predictors.
• Use the regression residual as the factor adjusted for both exposures.
• The document does not provide empirical comparisons or implementation details.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.