Research Paper

During this unprecedented time, we are observing severe spikes in liquidity parameters. In order to keep you informed, we have created the MSCI Liquidity Risk Monitor Special Report, a weekly interim report, demonstrating the behavior of several liquidity risk indicators during the global COVID-19 crisis. Use this report to view movement of key liquidity indicators, as well as to communicate these trends with your internal and external stakeholders.

Risk Management Analytics

MSCI Event

Portfolio Management Analytics Risk Management Analytics

Research Paper

In this study, we focus on some of the issues investors face when constructing long-only non-optimized single-factor portfolios using simple heuristics-based rank-select-weight algorithms. In doing so, investors may ask: Should they start from a universe of securities with a fixed target-market-cap coverage or a fixed number of securities? Should they assess factor exposure based on single or multiple factor descriptors? How broad a subset of securities will they use from the underlying...

Portfolio Management Analytics Risk Management Analytics

Research Paper

This is the second in a series of research papers proposing MSCI’s best practices for fund liquidity risk management. Here we propose best practices for liquidity stress testing at funds, drawing on guidelines from the European Securities and Markets Authority for undertakings for the collective investment in transferable securities (UCITS) and alternative investment funds. When designing market stress tests, we create both historical and hypothetical scenarios. Both cover at least three...

Risk Management Analytics

Research Paper

This is the first in a series of research papers proposing MSCI best practices for fund liquidity risk management. These practices were developed over the past years in collaboration with asset-management firms that have adopted MSCI’s liquidity risk management tools. The objectives of this study are as follows: to draw a synthesis from the progress generated in the field of fund liquidity risk management and address fund liquidity risk management through a systematic formulation of the...

Risk Management Analytics

Research Paper

The valuation of mortgage-backed securities is highly dependent on the accuracy and mathematical construction of the chosen interest-rate models. In this document, we discuss two key aspects of the choice of an interest-rate model for MBS: volatility skew and correlation structures of forward rates.

Risk Management Analytics

Research Paper

COVID-19 disrupted the operating models of many businesses and forced a shift to remote working, digitization and low-contact transactions and services, which we term “Remote Operation Capability” (ROC). Some corporations were better positioned to take advantage of a remote, automated and digitized operating environment. We utilized machine-learning and natural language-processing techniques to build a potential ROC factor that looks at the extent to which a company was more likely to thrive...

Risk Management Analytics Portfolio Management Analytics

Research Paper

LiquidityMetrics provides an analytical framework for liquidity risk management and regulatory reporting. This paper provides validation results for fixed-income securities through the lens of observed transaction costs. The validation period covers the relatively calm markets in 2019, as well as the onset and recovery from the COVID-19 crisis in 2020.

Risk Management Analytics LiquidityMetrics

Research Paper

Model testing, also called error tracking, is a key requirement for collateral behavior forecasting models in securitized products. The high dimensionality and statistical noise associated with agency mortgage-backed securities prepayment behavior makes error tracking a complex task. The traditional method focuses on a single dimension, and does not provide a clear measure of model accuracy and effectiveness. A rank-based error-tracking methodology provides an efficient and comprehensive...

Risk Management Analytics

Research Paper

This paper describes the MSCI Two-factor Interest Rate Model. The future cash flow of Mortgage-Backed Securities (MBS) is uncertain due to the embedded prepayment options. The typical MBS valuation relies on Option-Adjusted Spread (OAS) framework to price these prepayment options, which are a series of derivatives of interest rates across multiple tenors. A stochastic term structure model is subsequently needed with a reference curve and a volatility surface, which generates distributions of...

Risk Management Analytics