Delta-Sigma Attribution: Understanding Differences in Risk

9 Pages Posted: 23 Aug 2011

Date Written: July 13, 2011

Abstract

Investors face the challenge of understanding changes in risk. Did a recent increase in risk come from turnover into more aggressive positions, a spike in market volatility, or a loss of diversification? Which of the investor’s positions drove the change? Which parts of the market became more risky? A related issue is understanding differences among risk models. Do such differences indicate a weakness of one of the models, or do they provide insight into the evolving structure of the markets? The delta-sigma attribution framework addresses these issues by relating a change in risk to the underlying portfolio and market variables driving the change.

Keywords: Delta-Sigma Attribution, Understanding Differences in Risk, Risk Management, Multi-Asset portfolio, market variables

Suggested Citation

Shepard, Peter, Delta-Sigma Attribution: Understanding Differences in Risk (July 13, 2011). MSCI Barra Research Paper No. 2011-16, Available at SSRN: https://ssrn.com/abstract=1915331 or http://dx.doi.org/10.2139/ssrn.1915331

Peter Shepard (Contact Author)

MSCI Inc. ( email )

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

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