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Audrey Costabile

Research and Insights

Articles by Audrey Costabile

    Best Practices for Predictive Stress Tests in RiskManager and BarraOne

    Research Report | Apr 17, 2013 | Michael Hayes, Audrey Costabile, Rachael Smith

    A predictive stress test based on historical data can be a valuable tool in contemplating large market shocks. When the degree of extrapolation becomes excessive, or the prediction is based on a tenuous historical correlation, the predictive stress test can lead to unintuitive results that do not conform to reasonable market and economic expectations. This Research Insight offers best practices for users of RiskManager and BarraOne who want to design stress tests with correlated factors;...

    Stress Testing Market Report - Credit Risk: Default, Migration and Correlation Shocks - October 2012

    Research Report | Oct 26, 2012 | Audrey Costabile, Mark Schmude

    This stress test report uses CreditManager to examine the relative stability of sample credit portfolios. In a buy-and-hold context, our analysis suggests that 'book mode' generally produces lower risk figures that are more sensitive to ratings changes and correlation moves; conversely, in a mark-to-market context, 'migration mode' results produce larger risk figures that are less sensitive to ratings. In both test cases, the stresses demonstrate significant increases in capital, in the range...

    US Market Report - Volatility Regimes - August 2012

    Research Report | Aug 22, 2012 | Zoltán Nagy, Audrey Costabile

    This report analyzes USE4 factor returns during different volatility regimes during the last 17 years, with a focus on regimes with rapidly increasing volatility. Although these regimes were often associated with a decline in equity prices, some style and industry factors offered a hedge during these periods. Among styles: Momentum, Dividend Yield and Earnings Yield performed well in this environment. Among industry factors: Health Care, Utilities, and Consumer...

    Stress Testing Market Report - Risk On, Risk Off in a Multifactor World - August 2012

    Research Report | Aug 22, 2012 | Audrey Costabile, Zita Marossy

    The term “risk on, risk off” has become a common way to describe the challenges of recent market behavior. In the “risk on” scenario, investors display a greater appetite to buy “risky” assets, thus increasing equity prices. During periods of “risk off” behavior, risk aversion increases and flight-to-quality pushes equity prices lower, while “safe haven” assets outperform. In this paper, we examine how factors in the Barra...

    Stress-Testing in RiskManager: Contemplating a Eurozone Breakup - February 2012

    Research Report | Jul 13, 2012 | Audrey Costabile, Christopher Finger

    Since the beginning of the Eurozone crisis in 2009, it is apparent that structural issues persist, particularly in the European peripheral economies. Stress testing plays a pivotal role in the risk management process. This paper shows how a well-specified scenario can be used to understand and mitigate contagion effects resulting from a hypothetical sovereign default in Greece, Spain or Italy. Global asset and factor representative portfolios are stressed to reflect the impact of default on...

    Stress Testing Market Report - Testing for the End of the LTRO Effect - June 2012

    Research Report | Jun 29, 2012 | Audrey Costabile, Zita Marossy

    The European Central Bank’s Long-Term Refinancing Operation (LTRO) has altered the relationship between German sovereign yields and German credit default swap (CDS) spreads. In this report, we analyze the “LTRO Effect,” which creates additional demand for German bunds because of their safety as collateral. We propose a hypothetical stress test through the lens of RiskManager that explores the effects of removing the LTRO liquidity program. Our results suggest that the...

    US Market Report - Do High Performing REITs Offer Diversification? - June 2012

    Research Report | Jun 27, 2012 | Zoltán Nagy, Audrey Costabile

    Some portfolio managers think of REITs as a source of good returns, having low correlation with the broad equity market. This market report examines these claims by looking at sources of outperformance as well as sources of return, risk and correlation over the past five years. Using the Barra US Equity model (USE4), we show that recent REIT performance was mainly due to an industry effect; over the long run, exposures to style factors heavily influenced the return and risk of a REIT...

    Stress Testing for a Chinese Hard Landing

    Research Report | Jun 2, 2012 | Audrey Costabile

    With Eurozone weakness and slowing exports, China may be in for a hard landing in 2012. In this report, we examine the relationship between China and its trading partners through the lens of RiskManager and offer a hypothetical stress test.  We translate this macroeconomic event into market risks and test how these risks might impact global assets such as equities, bonds, and commodities.   

    US Market Report - Should I "Like" Facebook's IPO?

    Research Report | May 16, 2012 | Zoltán Nagy, Audrey Costabile

    The Facebook IPO raises questions about both the stock’s valuation and its risk characteristics. In this report, we explore how including or exluding  Facebook might affect the risk of style, or size segment portfolios of US equities. We also explain how the USE4 Model estimates factor exposures and specific risk of stocks before and after their IPO. For Facebook, we provide an estimation of those risk numbers, which can be used to create proxy assets in Barra Aegis or Barra...

    US Market Report - The Effect of the Bush Dividend Tax Cut - April 2012

    Research Report | Apr 30, 2012 | Zoltán Nagy, Audrey Costabile, Philippe Durand

    US investors are bracing themselves for the potential expiration of the 2003 Bush dividend tax cut.  To help portfolio managers prepare for this potential change in the US tax code, this Market Report uses the rich factor structure of the Barra US Equity Model to examine these issues: (1) what effect the initial tax cut had on dividend-paying stocks, (2) the impact of this policy on the overall stock market, and (3) the change in dividend policies of the issuing firms. 

    Multi-Asset Class Market Report - Stress-Testing in BarraOne: Contemplating a Eurozone Breakup - April 2012

    Research Report | Apr 30, 2012 | Keshav Choudhary, Audrey Costabile

    Since the beginning of the Eurozone crisis in 2009 it is apparent that structural issues persist, particularly in the European peripheral economies. Stress testing plays a pivotal role in the risk management process. This paper shows how a well-specified scenario can be used to understand and mitigate contagion effects resulting from a hypothetical sovereign default in Greece, Spain or Italy. Global asset and factor representative portfolios are stressed to reflect the impact of default on...

    Multi-Asset Class Market Report: Hedging the Risk of $200 per Barrel

    Research Report | Mar 30, 2012 | Audrey Costabile, Zita Marossy

    Oil prices have risen sharply during the last two years.  Investors concerned about further increases will want to guard against adverse effects on their portfolios.  In this Market Report, we investigate appropriate hedging strategies using the Barra Integrated Model, looking at how asset classes interact in different historical periods (and not simply relying on looking at previous periods of similar oil-price behavior).  The Barra Integrated Model allows investors to...

    Back to the Future of Risk Management

    Research Report | Sep 26, 2011 | Audrey Costabile, Frank Nielsen

    In 2009, MSCI conducted a global survey, The Future of Market Risk Management. The goal of this survey was to identify the most relevant issues for market risk, the role of the risk manager, and risk trends resulting from the aftermath of the financial crisis. In this paper, we review the results of the latest survey, MSCI’s 2011 Global Asset Owners Survey: Back to the Future of Risk Management. With 85 participants from 26 countries, this survey looks at risk management...