Take a closer look at innovations and shifts in investment management and risk assessment.

  • Comparing Two Financial Crises: Insights the GFC Offer Us Today

    This paper explores the similarities between the current COVID-19 crisis and the early stages of the global financial crisis (GFC) in an effort to identify sensible investment strategies for the next few weeks. Since some stocks experienced strong reversals during the GFC, we suggest that may occur now. In addition, factor strategies that outperformed during the GFC may also do well now.

    Anthony A. Renshaw, PhD Research Paper No. 156
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  • Quantifying Macroeconomic Risk

    This paper documents collaborative research between State Street and Qontigo on a framework for quantifying macroeconomic risk using a fundamental equity risk model. It expands this framework to a global context and applies it to the Axioma (AXWW4) World-Wide Equity Factor Risk Model, demonstrating how to construct a global macroeconomic risk model and how to use it for exposure monitoring, risk analysis, performance attribution, portfolio construction, and more.

    Thomas Bilbé Portfolio Manager, Active Quantitative Equity, State Street Global Advisors, Esther Mezey Research Director, Qontigo Research Paper No. 155
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  • A Sector Variant of the ROOF Score Methodology

    Last year we introduced the Qontigo ROOF Scores as a quantification of investor sentiment. The methodology uses the factor returns from eight style factors of Axioma’s short-horizon fundamental factor risk models, plus two indicators of market risk, to define the current level of risk appetite in the market. The idea behind this methodology is simple; by mapping various style factors in our model to a risk-tolerant or a risk-averse strategy type, and using the factor returns as a measure of each strategy’s ‘popularity’ on that day, we can compute an aggregate measure of investor risk appetite (a.k.a. Risk-On, Risk-Off, or ROOF Score).

    Olivier d'Assier, Executive Director, Applied Research APAC Research Paper No. 154
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  • High-Yield Bonds: Analyzing the Risk and Return Tradeoff When Rates are Negative

    In a world where some investors pay the government for the privilege of lending it money—and where even fixed income securities with the lowest investment-grade credit ratings yield barely more than 1% per annum—the “hunt for yield” becomes ever more challenging. Using a combination of risk analysis and stress testing, we examine the risk characteristics of corporate bond portfolios, with particular attention on the differences between investment-grade and high-yield securities.

    Christoph V. Schon, CFA, CIPM Executive Director, Applied Research Research Paper No. 153
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  • Deeper Insight Into Fixed Income Portfolios: Factor-based Attribution and Portfolio Construction with a DTS-style Risk Model

    The ability to attribute portfolio risk and performance to key factors, such as overall market exposure, rates, sectors, and quality, is an essential tool for helping portfolio managers to understand their risk and interpret their results. A parsimonious factor risk model can also support advanced portfolio construction goals, such as minimizing benchmark tracking error or realizing factor exposure tilts. It is notoriously difficult, however, to build such models for bond portfolios, as a myriad of data quality concerns arises, driven by a vast, frequently illiquid market. Advanced modeling techniques are required to trim outliers and infer term structure shapes from limited and noisy data, so that the factor returns used to measure portfolio risk reliably capture systemic risk rather than noise.

    Qontigo Research Paper No. 152
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  • STOXX Factor Indices: Targeted Factor Exposures with Managed Liquidity and Risk Profiles

    The STOXX Factor Index suite is comprised of five single-factor indices and a multifactor index engineered to deliver the excess returns associated with each factor using a diversified index of securities with carefully managed exposure, liquidity and risk characteristics. This paper provides a comprehensive description of the STOXX factor Indices and an extensive discussion of their characteristics and performance.

    Qontigo Applied Research Team Research Paper No. 151
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  • Markets celebrating! But Factor Investors? Not So Much…

    2019 was a remarkable year, with benchmarks around the world climbing to new records, while volatility plunged. Both emerging and developed markets shared in the overperformance, with all components of risk falling for both markets. However, style factors saw mixed results, with few reporting outsized returns for the quarter or year.

    Applied Research Team Research Paper No. 150
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  • How to model a trade war - just in case...

    The trade war between China and the US has been the single most important driver of financial market performance in the past three years, and despite the recent optimism that a “phase one” deal is within reach, there is still a distinct possibility for it to fall apart at the last minute. Similarly, the tariff decision on EU car imports has only been put on hold for another six months, keeping the threat alive for future use. This paper shows how stress tests can be a used to identify potential vulnerabilities and unwanted exposures in portfolios, and also points out strategies for diversification and loss-minimization.

    Christoph V. Schon, CFA, CIPM, Executive Director, Applied Research Research Paper No. 149
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  • A New Data-Driven Fixed-Income Risk Framework

    Modeling potential losses of a credit-risky bond portfolio based on granular, issuer-level return data is notoriously difficult. A myriad of data-quality concerns arise, driven by a vast, frequently illiquid market for which evaluated pricing is often stale, inconsistent or simply missing. Many issuers have only a small number of bonds outstanding. In fact, generally less than half of the issuers in USD high yield index portfolios have more than one bond outstanding that meets standard requirements for inclusion in a model estimation universe (sufficient maturity, etc.). Thus great care must be used to extract signal from data noise.

    Bill Morokoff, Managing Director, Research Research Paper No. 148
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  • Shortchanged by the No-Short Constraint — and Other Observations on 2019 Factor Performance

    Many quant managers are having a tough go of it this year. While one might blame factors in general, their returns do not tell the whole story (or even the bulk of the story). We think one of the major culprits in the US is that a number of factors worked better on the short side and among small-cap names, but even that does not explain all of the underperformance.

    Melissa R. Brown, CFA Research Paper No. 147
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