Take a closer look at innovations and shifts in investment management and risk assessment.

  • A Tactical Asset Allocation Workflow

    Long-term investors often passively track a strategic asset allocation benchmark whose weights across the various asset classes remains constant over a multi-year horizon (usually 10, 15 years, or longer). Specialist teams, internal or external, may be setup to add an active overlay portfolio in the form of a tactical asset allocation which deviates from the strategic benchmark over shorter time horizons. These programs are used to either de-risk the strategic portfolio in times of market stress, or to add alpha by aligning the portfolio with the economic cycle over shorter time periods (i.e. usually three to five years).

    Olivier d'Assier Research Paper No. 117
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  • Reverse Stress Testing Challenges: Toward a Systematic Framework

    Regulators have strongly endorsed reverse stress testing programs within financial institutions since reverse stress tests can explicitly examine the solvency of a firm. Reverse stress tests are designed to identify economic scenarios that will threaten a firm's survival and potentially help managers hedge against hidden scenarios. These stress tests are attractive from a risk perspective, but implementing a reverse stress testing program that is independent of a manager’s bias is difficult. In this paper, we outline a systematic, quantitative framework to design and construct reverse stress tests. This paper is our third installment on stress testing.

    Iulian Cotoi and Robert Stamicar Research Paper No. 116
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  • The Correlation See-Saw

    The first five months of 2018 were characterized by dramatic shifts in multi-asset class relationships, with an unusual back and forth of asset prices and correlations, as themes dominating the investment landscape alternated. In this paper, Christoph Schon analyzes how the different correlation regimes present during this time affected the overall volatility and risk decomposition of Axioma’s global multi-asset class model portfolio.

    Christoph V. Schon, CFA, CIPM Research Paper No. 115
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  • When Size Does Matter

    In this paper, Olivier d’Assier evaluates the use of a custom small-cap risk model built for this segment of the Japanese market using the Risk Model Machine (RMM) module in Axioma Portfolio Analytics. Do risk and performance attributions differ from the standard Japan risk model built on the full universe of stocks? What are, if any, the advantages delivered by the custom model for strategies focused on this market segment? Given these results, should small-cap managers include a custom risk model in their investment process?

    Olivier d'Assier Research Paper No. 114
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  • What Are the Odds?

    This paper, written by Olivier d'Assier, Axioma's Head of Applied Research for APAC, focuses on the risk and reward aspect of a risk analysis and how users can incorporate this information in their risk budgeting exercise.

    Olivier d'Assier Research Paper No. 113
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  • Q1 2018 Insights

    Farewell Low Volatility…
    Are we now closer to a trough or a peak?

    After falling to historically low levels at the end of 2017 volatility surged in the first quarter, driven mainly, but not exclusively by market risk. Against this backdrop, interestingly, style factors remained quite well-behaved.

    Melissa R. Brown, CFA Research Paper No. 112
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  • How Brexit Changed Financials’ Spots

    Since the UK’s decision to leave the European Union, investors have fretted over the impact of Brexit on the UK and European economies. At a high level, the UK and European financial sectors showed large negative returns before the vote and strong positive returns after. Risk peaked around the referendum date, only to decline abruptly afterwards. The question is, what were the main factors impacting this reversal in performance in each region and what were the contributors that led to the rise and decline in risk?

    Diana R. Rudean, PhD Research Paper No. 111
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  • The Many Faces of Japanese Style Portfolios

    This is the second paper in a series of looking at portfolio construction methodologies for designing style factor portfolios in the Asia-Pacific region written by Olivier d'Assier, Axioma's Head of Applied Research for APAC. In this paper, Olivier focuses on the Japanese market to construct three variants of a long-only active factor portfolios on the following five style factors from Axioma’s Japan fundamental medium horizon risk model (AXJP4 – MH): Dividend Yield, Momentum, Growth, Profitability, and Value. He then compares each variant on the basis of the implicit costs of constraints on the portfolio’s ability to gain a pure exposure to the target factor.

    Olivier d'Assier Research Paper No. 110
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  • Multi-period portfolio optimization with alpha decay

    This research paper appeared in The International Journal of Financial Engineering and Risk Management Special Issue on Applications of Optimization in Finance, Volume 2, Number 4, pp. 283-307.

    The traditional Markowitz MVO approach is based on a single-period model. Single period models do not utilize any data or decisions beyond the rebalancing time horizon with the result that their policies are "myopic" in nature. For long-term investors, multi-period optimization offers the opportunity to make "wait-and-see" policy decisions by including approximate forecasts and long-term policy decisions beyond the rebalancing time horizon. We consider portfolio optimization with a composite alpha signal that is composed of a short-term signal that has a high IC but decays rapidly, and a long-term alpha signal that has lower IC but more persistence. We develop a simple two stage multi-period model that incorporates this alpha model to construct the optimal portfolio at the end of the rebalancing period. We compare this model with the traditional single-period MVO model and show that the multi-period model generates portfolios that are likely to have a better realized performance.

    Kartik Sivaramakrishnan, Vishv Jeet and Dieter Vandenbussche Research Paper No. 109
  • The German Coalition Quandary: Reprise or reprice?

    In this paper, Christoph takes a look at the ongoing German coalition discussions as well as the recent market environment in Europe, marked by a number of notable elections in 2017 that include the Dutch general election, the French presidential election, and the UK general election. Ahead of the general vote by Social Democratic constituents in the first week of March 2018, Christoph analyses several potential outcomes to German political parties’ last-minute failure to form a coalition. Using recent European elections for historical correlations, Christoph applied transitive stress testing capabilities in Axioma Risk to estimate the impact of such a shock on a euro-denominated multi-asset class model portfolio. The first calibration period covered the run up to the French presidential and UK general elections, during which the EUR/USD exchange rate and global stock markets were positively correlated; the second calibration period showed similar correlations between equity and FX risk factors, resulting in a stronger market reaction to the exchange rate shock. Both stress tests showed severe developed stock market losses; however, exchange rate changes were very different in each scenario.

    Christoph V. Schon Research Paper No. 108
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