Barra, Inc., a global leader in risk management technology for investment professionals, today announced the Barra Multiple-Horizon Equity Model, the first fundamental risk model for institutional investors based on daily data.
The new model offers significantly more responsive and accurate risk forecasts by incorporating daily returns and investment horizon into Barra's industry- leading risk models. Available in two versions, short-term and long-term, the model provides meaningful risk forecasts to different types of investors.
"Barra's Multiple-Horizon Equity Model addresses the challenges presented by a rapidly changing risk environment," said Daniel Xystus, director of research at Chicago Equity Partners. "The new model retains the intuitive framework of the U.S. Equity Model and can now more quickly incorporate market inflection points."
The Market Drivers of Innovation
In the middle of 1998, equity risk levels began rising dramatically, with severe and abrupt changes in risk becoming more common. Forecasting risk in this environment is a difficult business, as the distant past tells us less about the future. By relying on daily instead of monthly returns, the Multiple-Horizon Equity Model can emphasize the recent past without compromising the quality of its forecasts. This more responsive model can adjust more quickly to changing market conditions, such as emerging trends and volatility shocks.
"Intelligent use of daily data greatly increases both the responsiveness and accuracy of risk forecasts," said Aamir Sheikh, president of Barra. "Together, the use of daily data and the recognition of investment horizon are key to providing the precision and control required by investors in today's more dynamic markets."
Investment Horizon Matters
Because investment horizon is an important consideration when volatility is dynamic, there are two versions of the Multiple-Horizon Equity Model. The Short-Term model is calibrated for high turnover managers, including hedge fund managers, who usually turn positions within one to six months. The Long- Term model is suitable for asset managers and plan sponsors who usually hold positions for a half-year or more.
Benefits to Portfolio Managers, Hedge Funds and Plan Sponsors
The Multiple-Horizon Equity Model is the first to calibrate risk forecasts for varying investment horizons, providing different kinds of investors with meaningful and accurate risk forecasts. This more responsive risk model can help portfolio managers, hedge funds and plan sponsors avoid disastrous surprises in times of heightened volatility, and recognize opportunities in times of crisis by quickly incorporating changing market conditions.
Availability
The Multiple-Horizon Equity Model is now available for U.S. markets. The Short-Term model is also available for Japanese markets. Other major equity markets are currently under development.