Guard factor regressions against unidentified models

factor_attribution.py

@@ -293,14 +293,23 @@ def run_factor_regression(
 
     x = regression_frame[factor_cols].astype(float).to_numpy()
     x = np.column_stack([np.ones(len(regression_frame)), x])
+    n_obs = len(regression_frame)
+    param_count = x.shape[1]
+    if n_obs <= param_count:
+        raise ValueError(
+            f"Insufficient observations for regression: need more than {param_count} rows, got {n_obs}"
+        )
+
+    coefficients, _, rank, _ = np.linalg.lstsq(x, y.to_numpy(), rcond=None)
+    if rank < param_count:
+        raise ValueError(
+            "Regression design matrix is rank-deficient; coefficients are not uniquely identified"
+        )
 
-    coefficients, _, _, _ = np.linalg.lstsq(x, y.to_numpy(), rcond=None)
     fitted = x @ coefficients
     residuals = y.to_numpy() - fitted
 
-    n_obs = len(regression_frame)
-    param_count = x.shape[1]
-    dof = max(n_obs - param_count, 1)
+    dof = n_obs - param_count
     residual_variance = float((residuals @ residuals) / dof)
     covariance = residual_variance * np.linalg.pinv(x.T @ x)
     standard_errors = np.sqrt(np.diag(covariance))

tests/test_factor_attribution.py

@@ -461,6 +461,35 @@ class RegressionTests(unittest.TestCase):
         self.assertEqual(result["end_date"], "2025-02-21")
         self.assertEqual(result["n_obs"], 296)
 
+    def test_run_factor_regression_rejects_underdetermined_designs(self):
+        dates = pd.date_range("2024-01-01", periods=3, freq="B")
+        factors = pd.DataFrame(
+            {
+                "MKT_RF": [0.01, -0.02, 0.015],
+                "SMB": [0.005, 0.004, -0.001],
+            },
+            index=dates,
+        )
+        strategy = pd.Series([0.012, -0.018, 0.019], index=dates)
+
+        with self.assertRaisesRegex(ValueError, "Insufficient observations"):
+            run_factor_regression(strategy, factors, factor_cols=["MKT_RF", "SMB"])
+
+    def test_run_factor_regression_rejects_rank_deficient_designs(self):
+        dates = pd.date_range("2024-01-01", periods=6, freq="B")
+        market = np.array([0.01, -0.02, 0.015, 0.005, -0.01, 0.02])
+        factors = pd.DataFrame(
+            {
+                "MKT_RF": market,
+                "SMB": market * 2.0,
+            },
+            index=dates,
+        )
+        strategy = pd.Series(0.0005 + 1.0 * factors["MKT_RF"] + 0.5 * factors["SMB"], index=dates)
+
+        with self.assertRaisesRegex(ValueError, "rank-deficient"):
+            run_factor_regression(strategy, factors, factor_cols=["MKT_RF", "SMB"])
+
     def test_prepare_factor_models_uses_proxy_family_without_external_us_factors(self):
         dates = pd.date_range("2024-01-01", periods=5, freq="B")
         extension = pd.DataFrame(