Msci, barra, riskmetrics and fea and all other service marks referred to herein are the exclusive property of msci andor its subsidiaries. A multiplefactor model, gem captures the effects of common factors such as local markets and industries as. As we shall see, barras risk model provides accurate, robust, and intuitively appealing risk forecasts. Barra risk factor analysis definition investopedia. Our platform provides a portfolio and risk management workflow for institutional asset. We present an empirical study focusing on the estimation of a fundamental multi factor model for a universe of european stocks. The focus of this paper is on global equity factor models, but the underlying concepts are. Barra now an msci company for instance has undertaken the research of factors since the. Factor analysis principal components analysis statistical factor models. All style factors in the barra gemlt and other barra fundamental equity factor models are constructed in five primary steps. The standard is based on the factor structure in the latest global barra equity factor risk model, the barra global total market equity model for longterm investors gemlt, morozov, 2016.
The the fact that many anomalies have persisted for decades suggests they are not evidence. We use classical techniques in finance to compute risk exposures to each relevant factor for us equities. For over 40 years msci, starting with barra, has researched factors to determine their effects on long term equity performance. Jun 17, 2015 the latest model joins mscis new barra u. Factorbased investing can approximate, and in some cases replicate, the risk exposures. We introduce msci facs, a classification standard and framework for analyzing and reporting style factors in equity portfolios. Msci introduces barra china equity model ns banking. Optimization bias adjustment adjusts the covariance matrix and improves risk forecasts for optimized portfolios. The barra risk factor analysis is a multifactor model created by barra inc. The msci barra factor indexes longshort, market neutral and longonly are currently constructed using the barra europe equity base model short term.
With over 45 years of expertise in research, data and technology, we power better investment decisions by enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. The msci factor indexes seek to reflect the performance characteristics of a range of investment styles and strategies using transparent and rulesbased methodologies. Mscis barra global equity factor model gemlt extends beyond msci facs to include 8 factor groups and 16 factors with an additional 41 factor descriptors. May 07, 2010 we also discuss the characteristics of pure factor portfolios, and how differences between simple and pure factor portfolios arise due to collinearity between factors. The rebalancing date for the msci barra factor indexes is as specified in appendix iii the. Factor investing is transforming the way investors construct and manage portfolios. Bloombergs factor model mojvajon and objecves bloombergs factor model interprejng exposures replicajon process results conclusion appendix 10 for the mul. These might correspond to industry or country membership, or to some other stock characteristics such as beta, booktoprice ratio, or. The first multi factor risk model for the us market, dubbed the barra use1 model, was released in 1975.
We also discuss the characteristics of pure factor portfolios, and how differences between simple and pure factor portfolios arise due to collinearity between factors. Estimation of the factor realizations for each time period t consider the crosssectional regression for the factor. Based on the msci barra global equity factor model. Rosenberg founded barra, which made widespread use of multi factor risk models and dedicated itself to helping practitioners implement the theoretical insights of markowitz, tobin, sharpe, and others. The quantopian risk model is a 16factor risk model built to aid our users and investment in the research and evaluation of highquality trading algorithms. This is the third of a series of research bulletins to mark the launch of the new and enhanced barra global equity model gem2, and its focus is on the newlyintroduced liquidity factor. This is a selfbuild project for studying purpose only. All msci indexes and data are the exclusive property of msci and may not be used in any way without the express written permission of msci. Our aim is to produce a document that is clear and concise, yet comprehensive as well. Gics was developed in response to the global financial communitys.
Liquidity lower ftse developed illiquidity factor index 30 sep. To achieve maximum returns consistent with an investors appetite for risk, the correct identification and estimation of all relevant risk factors in a portfolio are necessary. This factor exposure snapshot of esg leaders and laggards based on esg scores in the msci world index shows esg is related to high profitability, large size, negative booktoprice, higher beta, and low residual volatility source. To illustrate the historical performance of factor tilts we again use the msci barra factor definitions for value, size, momentum and volatility, as well as northern trust s proprietary quality factor across domestic, international and emerging markets. Total market equity model suite, which was built to include factor structures that are aligned with multiple investment horizons. Statistical factor models derive their factors from factor analysis of the covariance matrix of security returns.
Msci, factor risk modelling, barra us equity model, use4. Linear factor model macroeconomic factor models fundamental factor models statistical factor models. The proportion of explained variance ranges from 7. In fundamental factor models, the exposures represent intuitive attributes of individual stocks. I also constructed different risk factor portfolios using riskparity methods to see whether it is possible to enhance the returns of risk factor indices by combining them. We introduce several intuitive measures of collinearity in factor models, and present their empirical distributions in the context of a global equity model. All risk and factor calculations are performed using the. Finally, the factor is winsorized and standardized. Msci is a leading provider of critical decision support tools and services for the global investment community. Msci prides itself not only on setting the standard for excellence in factor risk modeling, but also on being the industry leader in model transparency. Each msci factor index is derived from the equity universe of a traditional market cap weighted msci parent index. The standard deviation is a natural measure of security risk because it. Model highlights this document describes the new methodologies that underpin the use4 model. This factor reflects the stock performance of firms with high trading activity relative to.
This factor reflects the stock performance of firms with high trading activity relative to those with low trading activity. The barra capabilities have been integrated into our eikon platform. The first multifactor risk model for the us market, dubbed the barra use1 model, was released in 1975. The standard deviation is a natural measure of security risk because it mea. All risk and factor calculations are performed using the barra longterm global equity model gemlt.
A multiplefactor model, gem captures the effects of common factors such as local markets and industries as well as currencies on portfolio return. It publishes the msci bric, msci world and msci eafe indexes. We present an empirical study focusing on the estimation of a fundamental multifactor model for a universe of european stocks. We highlight the complementary role of the fundamental factor model to traditional security analysis and point out the insights these models can provide. Mscis market leading barra global equity model gem2 account for factor volatility and correlation. E fund management managing director zhen liu, who is also an msci client, said the barra china equity model cne5 is a major improvement over its predecessor, che2, with better industry classifications, new chinaspecific factor set, and much updated modelling methodology as used in the barra us equity model use4. The factor model can help us achieve the desired portfolio market exposure by identifying other assets with low value exposures and high market exposures. Pdf barra risk model handbook chitrasen samantra academia. New factors include residual volatility and beta replacing the gem2 volatility factor, and the gem2 value factor is split into three factors. Other researchers, including mitchell and pulvino 2001 and. Rosenberg founded barra, which made widespread use of multifactor risk models and dedicated itself to helping practitioners implement the theoretical insights of markowitz, tobin, sharpe, and others. Msci s barra global equity factor model and includes 8 factor groups and 16 factors.
The universe contains over 1,600 stocks and is therefore sufficiently diversified for the statistical analysis performed in this paper. Factors are the building blocks of many portfolios the elements capable of turning data points into actionable insights. The barra risk factor analysis is a multi factor model created by barra inc. None of the information, msci barra indices, models or other products or services is intended to constitute investment.
Msci s barra global equity factor model gemlt extends beyond msci facs to include 8 factor groups and 16 factors with an additional 41 factor descriptors. Want to learn more about msci factorlab or the msci factor crowding model. Fundamental analysis and the barra fundamental factor model. Any use of or access to products, services or information of msci requires a license from msci. Gics was developed in response to the global financial communitys need for one complete, consistent set of global sector and. Statistical factor models introduction factor models for asset returns are used to decompose risk and return into explanable and unexplainable components generate estimates of abnormal return describe the covariance structure of returns.
This chart provides cumulative returns for several gem2 factors. When building a fundamental factor model, we look for variables that explain return, just as fundamental analysts do. Factor models for asset returns university of washington. The most recent barra us equity model, use4, contains some important innovations in factor risk modelling, including the introduction of country risk factors, volatility regime adjustments, and eigenfactor risk adjustments. Mscis barra global equity factor model and includes 8 factor groups and 16 factors. Jan 24, 2009 this is the third of a series of research bulletins to mark the launch of the new and enhanced barra global equity model gem2, and its focus is on the newlyintroduced liquidity factor. In this paper, we identify the role of foreign currency as an important risk factor from an. The rebalancing of the msci market neutral barra factor indexes is conducted as of the. Model insight the barra us equity model use4 empirical notes yang liu jose menchero d. Barra now an msci company for instance has undertaken the research of factors since the 1970s. Msci managing director and head of equity portfolio management analytics, peter zangari said, barra use4 is a new model with a new methodology and an updated factor structure that gives portfolio managers a better understanding of their sources. Three factormodel with the addition of carhart momentum factor could explain the returns of mscis risk factor indices. Characteristics of factor portfolios, march 2010 by jose. A look at the liquidity factor in gem2 by msci inc.
Msci has developed factor indexes, facs and analytics backed by four decades of factor research and innovation. The msci mac factor model provides the following support and insights for global investing. We can eliminate unwanted market risk while enhancing our value tilt by underweighting them in the correct proportions. Consultation on transition of msci europe barra factor indexes to. Insights guy miller executive director, msci barra equity model research. Msci s latest factor innovation, the msci multiasset class factor model msci mac factor model, provides high to low granularity in looking at factors through an integrated and consistent framework.
579 17 205 56 880 849 1614 47 255 273 972 1264 436 964 495 538 312 1603 1608 134 1299 971 403 415 435 1581 224 690 615 327 288 1312 106 1283