Research Articles

Both inflationary and deflationary concerns have emerged as global economies continue to struggle with recovery.  In this confusing environment, inflation-protected bonds can play an important role in plan sponsors’ asset allocation dilemma especially in light of yesterday’s Fed announcement of Quantitative Easing (II) implementation plan.  We find that IPBs have exhibited some distinct differences from other asset classes during the past decade.
 

Publication: MSCI Research Insight
Authors: ANAND Iyer, BENDER Jennifer

The analysis of a possible positive relationship between economic growth and stock market returns is interesting both theoretically and practically. Investors often wonder if they should assign higher weight to countries with higher economic performance, hoping that economic growth will eventually show up in equity returns. Although this relationship seems quite intuitive, historically long-run stock price growth has fallen short of GDP growth in many countries. In this bulletin, we use long-term equity data to analyze the steps leading from GDP to stock prices, and point out several factors that could explain why GDP growth is diluted before it can reach shareholders.

Publication: MSCI Barra Research Insight
Authors: BENDER Jennifer, LEE Jyh-Huei

This bulletin is the first in a series aimed at asset managers with fundamental processes. Here, we look at the momentum characteristics of deep value managers and highlight the importance of monitoring momentum tilts at the portfolio level. Value investing has been around for years and it is one of the most common investment themes around the world. Although this paper uses US based value managers for illustration, the concepts should appeal broadly to value managers around the globe.

Publication: MSCI Barra Research Bulletin
Authors: BANERJEE Arnab, BENDER Jennifer

The 2008 crisis has offered another look at how emerging market stocks have behaved relative to developed markets.  In the aftermath of the crisis, we take a fresh look at emerging markets to explore these questions: Have emerging markets matched growth forecasts? Which segments have performed well? How have emerging markets behaved relative to developed markets?  While in the aggregate, emerging market stocks were not immune to the crisis, there were some clear differences between emerging and developed markets in the performance of particular sectors and styles.

Publication: MSCI Barra Research Insight
Authors: BENDER Jennifer, NIELSEN Frank, Subramanian Madhusudan

A successful investment process requires a risk management structure that addresses multiple aspects of risk. Here we lay out a best practices framework that rests on three pillars: Risk Measurement, Risk Monitoring, and Risk-Adjusted Investment Management. All three are critical. Risk Measurement means using the right tools accurately to quantify risk from various perspectives. Risk Monitoring means tracking the output from the tools and flagging anomalies on a regular and timely basis. Risk-Adjusted Investment Management (RAIM) uses the information from Measurement and Monitoring to align the portfolio with expectations and risk tolerance.

This paper was also published in 'The Capco Institute Joural of Financial Transformation', 03/2010/#28.

Publication: MSCI Barra Research Insights
Authors: BENDER Jennifer, NIELSEN Frank

The misalignment of alpha and risk factors may result in inadvertent and unwanted bets that may hamper performance. Lee and Stefek (2008) show that better aligning risk factors with alpha factors may improve the information ratio of optimized portfolios. They propose four ways of modifying a risk model to reduce misalignment. Here, we discuss one way to mitigate these problems by modifying the optimization process, itself. The objective function is modified to include a penalty term on the residual alpha. In our examples, the method proposed helps to mitigate the mismatch between alpha and risk by assigning a suitable penalty to the residual alpha.

Publication: MSCI Barra Research Insights
Authors: BENDER Jennifer, LEE Jyh-Huei, STEFEK Dan

Frequently investors have much more information than they can possibly digest. Developing and employing efficient information processing machinery to handle large amounts of data in a consistent way is the key to success in this environment. In this article we argue that it is critical for international equity asset managers to organize information according to its scope. The structure outlined here categorizes information into three types--global, local, and asset-specific. While we confine ourselves to these three types for illustration purposes, the model is readily expandable to other types of information. Other asset classes can be introduced as well.

Publication: MSCI Barra Research Insights
Authors: BENDER Jennifer, PUCHKOV Anton V