  Factor modeling of asset returns has been a dominant practice in investment
science since the introduction of the Capital Asset Pricing Model (CAPM) and
the Arbitrage Pricing Theory (APT). The factors, which account for the
systematic risk, are either specified or interpreted to be exogenous. They
explain a significant portion of the risk in large portfolios. We propose a
framework that asks how much of the risk, that we see in equity markets, may be
explained by the asset returns themselves. To answer this question, we
decompose the asset returns into an endogenous component and the remainder, and
analyze the properties of the resulting risk decomposition. Statistical methods
to estimate this decomposition from data are provided along with empirical
tests. Our results point to the possibility that most of the risk in equity
markets may be explained by a sparse network of interacting assets (or their
issuing firms). This sparse network can give the appearance of a set exogenous
factors where, in fact, there may be none. We illustrate our results with
several case studies.
