Adaptive Risk Management

Gréta Kránicz, Balázs Vajda and Juan Sampieri

Since the surge in COVID-19-related market risk in March, investors’ perspective on risk might have evolved. When the crisis hit, some investors focused on the responsiveness of risk models. Risk levels have since receded almost as quickly, and investors may have chosen to return to more stable models, which were more in line with realized returns in recent months. Backtesting various risk-model alternatives may help support such modeling decisions. And multiple models may provide flexibility to support various investment functions, from compliance to risk and trading. 

Model volatility is displayed against weekly and monthly returns (based on the selected portfolio) for Short, Long and Extra-Long versions of the MSCI Multi-Asset Class Factor Model. When the model is in line with realized returns, about 95% of the returns should fall within this “risk envelope” during any given period. The risk envelope represents +/- 2x the volatility forecast.

Learn more: MSCI Multi-Asset Class (MAC) Factor Model Validation (client-access only)