Maximum drawdown, the largest cumulative loss from peak to trough, is one of the most widely used indicators of risk in the fund management industry, but one of the least developed in the context of probabilistic risk metrics. We formalize drawdown risk as Conditional Expected Drawdown (CED),...

Wrong way risk can be incorporated in Credit Value Adjustment (CVA) calculations in a reduced form model. Hull and White [2012] introduced a CVA model that captures wrong way risk by expressing the stochastic intensity of a counterparty's default time in terms of the financial institution's...

This paper describes an empirical study of shortfall optimization with Barra Extreme Risk. We compare minimum shortfall to minimum variance portfolios in the US, UK, and Japanese equity markets using Barra Style Factors (Value, Growth, Momentum, etc.). We show that minimizing shortfall generally...

Risk-only investment strategies have been growing in popularity as traditional in- vestment strategies have fallen short of return targets over the last decade. However, risk-based investors should be aware of four things. First, theoretical considerations and empirical studies show that...

We explore the cost of implicit leverage associated with an S&P 500 Index futures contract and derive an implied financing rate. While this implicit financing rate has often been attractive relative to market rates on explicit financing, the relationship between the implicit and explicit...

Endowments, foundations and individual investors considering the divestment of carbon industries need to know the potential impact on risk and return. In this paper, we analyze the cost of divesting from broad market indices. Our key findings are:• Optimized carbon-free portfolios closely...

Factor analysis of security returns aims to decompose a return covariance matrix into systematic and specific risk components. To date, most commercially successful factor analysis has been based on fundamental models, although there is a large academic literature on statistical models. While...

From the inception of the recent financial crisis in July 2007 to the turnaround in March 2009, the MSCI UK Value Investable Market Index (MSCI UK Value IMI) lost roughly 65% of its value, and then recovered half its losses during the remainder of 2009. In this Research Insight, we use the Barra...

We use the Barra Extreme Risk (BxR) model to analyze a US dollar-denominated corporate bond portfolio consisting of 2142 distinct issues. As in the case of equities, we find that the BxR proprietary extreme risk forecasts, xShortfall and xVaR, are higher than value-at-risk and expected-shortfall...

Factor models are standards in investment management. For decades, Barra factor models have provided valuable risk forecasts and inputs for the portfolio construction process. Most uses of factor models have targeted longer horizons of months or years. However, we demonstrate in this paper that...