Michael Brenndoerfer | Data & AI, Private Equity, Technology

Regression Analysis for Financial Relationships › Key Parameters

Michael BrenndoerferDecember 11, 20252 min read

Part 8 of 15Econometrics and Statistical Modeling

Chapter 43Regression Analysis for Financial Relationships › Key Parameters

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The key parameters for regression models in finance are:

y: Dependent variable (e.g., stock returns). The target variable to be explained.
X: Independent variables (factors). The explanatory variables such as market returns.
$\alpha$ : Intercept (Alpha). Measures abnormal performance not explained by factors.
$\beta$ : Slope (Beta). Measures systematic risk or sensitivity to a factor.
$\varepsilon$ : Error term. Captures idiosyncratic risk and unexplained variation.
$R^2$ : R-squared. Indicates the proportion of variance explained by the model.

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