On the Aggregation of Local Risk Models for Global Risk Management

Posted: 10 Nov 2005

See all articles by Lisa R. Goldberg

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

C. Greg Anderson

MSCI Barra

Alec N. Kercheval

Florida State University - Department of Mathematics

Guy Miller

BARRA, Inc. - Equity Research

Kathy Sorge

Morgan Stanley - Fixed Income Research

Multiple version iconThere are 2 versions of this paper

Abstract

Given a collection of single-market covariance matrix forecasts for different markets, we describe how to embed them into a global forecast of total risk. We do this by starting with any global covariance matrix forecast that contains information about cross-market correlations and revise it to agree with the pre-specified sub-market matrices, preserving the requirement that a covariance matrix be positive semi-definite. We characterize the ways this can be done and address the resulting numerical optimization problem.

Keywords: single-market covariance matrix forecasts, global forecast, global covariance matrix forecast, cross-market correlations, positive semi-definite, numerical optimization problem

Suggested Citation

Goldberg, Lisa R. and Anderson, C. Greg and Kercheval, Alec N. and Miller, Guy and Sorge, Kathy, On the Aggregation of Local Risk Models for Global Risk Management. Journal of Risk, Vol. 8, No. 1, Fall 2005, Available at SSRN: https://ssrn.com/abstract=839784

Lisa R. Goldberg

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

C. Greg Anderson

MSCI Barra ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Alec N. Kercheval (Contact Author)

Florida State University - Department of Mathematics ( email )

Tallahassee, FL 32306
United States
850-644-8701 (Phone)
850-644-4053 (Fax)

Guy Miller

BARRA, Inc. - Equity Research ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Kathy Sorge

Morgan Stanley - Fixed Income Research ( email )

2100 Milvia Street
Berkeley, CA 94704
United States

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