Identifying Sources of Correlation in Global Equity Portfolios (September 2010)
7 Pages Posted: 14 Nov 2010
Date Written: September 28, 2010
Abstract
With 153 factors, the Barra Global Equity Model (GEM2) provides a rich and granular view of the global equity space and the main sources of return and risk. However, having 153 factors leads to 11,628 unique correlations/covariances between factors, which makes it a challenge for managers to assess correlations in a meaningful way. In this Research Bulletin, we show how the correlation (covariance) information can be aggregated into groups, such as diagonal and off-diagonal blocks based on factor types. We also show an even more intuitive way to understand which factors carry the most risk by using the X-Sigma-Rho attribution framework proposed by Davis and Menchero (2010).
Keywords: identifying sources of correlation Global Equity Portfolio Barra Global Equity Model GEM2 covariance X-Sigma-Rho attribution framework Davis Menchero
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