A Critical Review on Evolution of Risk Factors and Factor Models

Abstract The purpose of this work is to critically evaluate the evolution of risk factors and factor models. A systematic and structured literature review is carried out to observe and understand the past trends and extant patterns/themes in the present research area, evaluate contributions and summarize knowledge, thereby identifying limitations, implications and potential directions of further research. The main message from the study is that evolution of risk factors and factor models are continuous and endless development. Still today over 300 risk factors are identified by the researchers and many other yet to be discovered but out of them all only few are significantly responsible in explaining the stock markets risk return relationship. Study classifies risk factors into two groups: global and specific risk factors. Study answer the question ‘whether evolution of risk factors and factor models are endless development’. Finally, the present study gives an appropriate direction to the future studies to be taken in terms of risk factors and factor models. Due to continuous evolution and changing of nature of the risk factor it seems quite impossible to have a stable efficient factor models that can explain stock market risk return relationship globally in long run.