Research Articles

Stock picking often is carried out with stock screens that reduce the set of eligible stocks. Such screens usually are assessed through the level and volatility of the resultant returns, mostly with associated statistics such as information ratio or Sharpe ratio. This evaluation, however, often is insufficient to uncover unintended bets, and this research bulletin suggests complementing this evaluation by conducting Barra performance attribution on the portfolios obtained from such screening strategies. For example, performance attribution indicates that the book-to-price screen performed relatively poorly in Australia because of an unintended tilt toward low-momentum stocks. In Japan, performance attribution shows that the superior performance of book-to-price over dividend yield as a selection screen from 2009 onward was largely due to non-value tilts.

Publication: MSCI Research Bulletin
Authors: MSCI Barra Applied Research

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 Bulletin
Authors: MSCI Barra Applied Research , NAGY Zoltan

This research bulletin is the first in a series covering various aspects of stress testing and scenario analysis. In this paper, we compare and contrast two historical scenarios that may be of current interest given the increasing uncertainty regarding the returns on sovereign fixed income investments. The scenarios we consider here are the 1998 Russian debt crisis and the 1994 US rate hike that followed the savings and loan (S&L) crisis. We put a stylized US pension plan through the stress tests using BarraOne, a risk platform that provides more than 60 preloaded historical scenarios from the 1970s to the present. Each scenario that we consider applies shocks to global market factors for equities, interest rates, credit spreads, FX rates, and commodities. We review the effect of the scenarios on the pension plan, and we discuss possible hedges.

Publication: MSCI Barra Research Bulletin
Authors: BRIAND Remy, MSCI Barra Applied Research , VANNEREM Philippe

The Momentum factor in the Barra Global Equity Model (GEM2) recently experienced its largest negative historical return in more than a decade. The Momentum factor has declined for 10 consecutive months, which is unprecedented in the 13-year GEM2 factor return history. In this Research Bulletin, we explore the reasons for this decline as well as other reasons, particularly economic reasons, for Momentum changes. Focusing on GEM2, we find consumer sentiment to be a significant explanatory variable for Momentum changes.

Publication: MSCI Barra Research Bulletin
Authors: MSCI Barra Applied Research

Unprecedented political, economic, and technological developments in the last 20 years have resulted in a high degree of integration across companies, industries, and markets around the world. Institutional equity portfolio construction appears to be lagging behind, with most institutional portfolios still suffering from significant home bias effects. Using data from the UK market, we have shown that adopting a market-cap weighted global policy benchmark instead of a traditional home bias approach could potentially have substantial benefits for investors' risk-adjusted performance and exposure to tail risk.

Publication: MSCI Barra Research Bulletin
Authors: MSCI Barra Applied Research

The Barra Global Equity Model (GEM2) introduced Volatility, a new factor that provides managers with a tool that enables close control of a portfolios' exposure to global beta. GEM2's Volatility factor includes global beta as its most significant descriptor. In contrast its predecessor, GEM, provided much less control, i.e., only through exposures to country factors. In this Research Bulletin, we backtest a high global beta portfolio using both GEM and GEM2, and we use performance attribution to demonstrate the advantages of using GEM2

Publication: MSCI Barra Research Bulletin
Authors: MSCI Barra Applied Research

In this Research Bulletin, we take a look at the performance of the BRIC countries—Brazil, Russia, India, and China—in 2009.  These equity markets have experienced significant gains since the start of the year.  We decompose the performance of the MSCI indices for these markets using the Barra Global Equity Model (GEM2).  While many investors often think of investing in BRICs as pure country plays, there may be significant industry biases that drive performance at certain times.  Attribution using a factor model can help disentangle pure country, and industry and style effects so that investors can understand where performance is truly coming from. For BRICs, the country effect continues to dominate these markets, but other effects should not be ignored.

Publication: MSCI Barra Research Bulletin
Authors: MSCI Barra Applied Research

The ongoing shakeout in global markets has had far-reaching consequences for equities across the world. For developed market investors seeking diversification through emerging markets at the aggregate level, the recent performance has been disappointing due to the dominance of overall negative market effects, which is consistent with what we have observed in past crises. The good news for developed market investors is that diversification possibilities did exist over the recent period for developed market investors willing to invest more granularly (for instance, in certain countries, regions, and styles), and able to at least partially hedge out market risk.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

After the market turmoil of the last two years, many institutional investors are revisiting the way they approach asset allocation. For decades, the traditional breakdown of asset classes has been along the lines of equities, fixed income, alternatives, etc., sometimes with domestic versus foreign flavors. The main point we highlight in this Research Bulletin is that many asset classes share the same underlying drivers. While this notion is a familiar one, the insights gained by analyzing common drivers of risk and return across asset classes are not always applied to decisions about asset allocation.  For example, private equity investments share key fundamental drivers with public equities yet are often perceived as a separate and distinct asset class.  Or in the case of corporate bonds, the credit worthiness of the bonds depends on the financial health of the issuing corporation, which in turn is linked to the performance of the company's equity securities.  These types of underlying linkages can be addressed by factor-based models and can be used in factor-based asset allocation schemes.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Traditional models in finance rely heavily on the use of normal (Gaussian) distribution.  Using examples of asset, factor and index returns, we illustrate that the assumption of normality does not capture the empirical properties of returns and volatility alone cannot be relied on as a measure of portfolio risk.  We outline how extreme value theory can help to model the tails of the return distribution and, using data from 1996 to 2007, show how Barra Extreme Risk can improve estimates of Value at Risk for a collection of factor-tilted portfolios.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

The China A share market has experienced tremendous volatility over the last three years. This research bulletin examines this volatility through the lens of the Barra China Equity Model (CHE2), especially in light of the turbulence of global markets in recent months.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

An earlier MSCI Barra Research Bulletin on the risk environment in Japanese stocks, published in June 2008, noted that market volatility in Japan rose sharply since August 2007 but declined after peaking in early 2008. Since then, the risk environment has deteriorated significantly, especially in October and November 2008. This Research Bulletin provides an update to the current risk climate for Japanese equities and identifies significant changes in major risk factors after this latest period of turbulence.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This latest research bulletin in the GEM2 Series considers the degree of global exposure of different industries at the global level, and constructs a measure that is based on the GEM2 Model.  It then examines how differences in global exposure across industries are related to style, return and risk characteristics.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

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 newly-introduced liquidity factor. This factor reflects the stock performance of firms with high trading activity relative to those with low trading activity. The stable and upward trend of this factor over the last decade indicates that stocks with high trading volumes had provided a sizable and persistent premium in this period. It is also found that the market is subject to wider swings in periods in which the absolute change in the liquidity factor is statistically different from zero.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

As the year draws to an end, the ongoing shakeout in the financial sector and recessionary woes continue to fuel uncertainty in the US equity market. Volatility has far surpassed its previous 2002 peak. This brief bulletin highlights the remarkable increase in the USE3 Barra risk forecasts in November and December 2008.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Given the extreme market events of recent weeks, MSCI Barra revisits the performance of various risk measures in this update to our March 2007 Research Bulletin, 'Fear Factor and the Barra Risk Model'. As discussed in that article, both the Chicago Options Exchange Volatility Index (VIX) and the Barra US Equity Models reacted rapidly to changing levels of market risk.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This is the first in a series of Research Bulletins to mark the launch of the new and enhanced Barra Global Equity Model (GEM2). In this piece, it is shown how GEM2 may be used to track the changing importance of country and industry effects in global equity markets. This information is of use to a portfolio manager in determining the relative size of the opportunity set to generate active returns from country allocation or sector rotation. The results indicate that the relative importance of industry versus country varies across regions and over time. For instance, in emerging markets the potential to generate active returns from country allocation is significantly higher than from sector rotation, while the reverse is true in the developed world.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This is the second 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 new financial leverage factor. This factor reflects the performance of highly leveraged firms relative to firms with low leverage. The relative performance of high-leverage firms is examined under varying stock market conditions and risk environments. The leverage factor is also analyzed for any industry tilts that would result in unintended industry exposures.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

The global credit crunch that has unfolded over the past 12 months culminated last week in a number of unprecedented events, including the disappearance of a major US investment bank, the government bailout of the largest US insurance company, and the overnight takeover of the largest UK mortgage bank. In this latest Research Bulletin we look at how the performance and risk characteristics of financial sectors and stocks around the world have been affected by the current market turmoil.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This Research Bulletin looks at an often overlooked but important challenge—the allocation of resources behind investment strategies. All asset managers face the problem of how to best allocate resources, be it analysts, computational power or physical resources. Assigning more resources to segments that have more names to cover is one straightforward way. Alternatively, return dispersion (i.e., cross sectional volatility) reflects the opportunity set available to asset managers, and therefore may be another logical way. For CIOs who may consider assigning research resources via return dispersion, this article looks at the relationship between the size of different investment universes and the cross-sectional return dispersion.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

The objective of this study is to search for equity attributes that can be used to hedge against inflation by looking into the behavior of common factors during inflationary periods. Using the results, we analyze the properties of the recently launched MSCI Commodity Producers Indices to assess their potential application in addressing inflation.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This Research Bulletin presents a snapshot of the current risk environment in Japan.  The analysis includes a look at volatility and recent developments in the risk environment as well as investment trends.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

The bursting of the credit market bubble last year and the collapse of a major US investment bank last week resulted in a aggressive rate cutting action from 5.25% to 2.25% during the last six months, similar to the bursting of the equity market bubble in 2000 and the terrorist attacks in 2001 which prompted the Fed to cut interest rates aggressively from 6.50% to 1.75% during 2001. In this note, we examine Barra USE3S (Short term US equity risk model) factor returns' performance, volatility and correlations and identify similarities and differences across the two recent rate cutting phases.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This article illuminates the drivers behind the large and extreme movements observed on August 8 and November 12.  The paper looks at Momentum factors both in the U.S. and Europe and analyzes the relationships to daily trading volume and asset returns along with a discussion of the other quantitative factors.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Over the long run in the US, value stocks have outperformed growth stocks, a premium that has averaged roughly 200 basis points annually over the last four decades. Since May of this year, growth stocks have exhibited strength over value stocks, as evidenced by the MSCI USA Value and Growth Indices. In fact, the growth premium has averaged 14 percentage points annualized over the last four months—June, July, August, and September. In this article, we put this recent development in historical context and briefly discuss its differences from past periods and its possible drivers.

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

Publication: MSCI Barra Research Bulletins
Authors: MSCI Barra Applied Research

This article provides interesting insights into recent changes in the risk environment in the Chinese stock market.

Publication: MSCI Barra Research Insights
Authors: MSCI Barra Applied Research