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
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