Qontigo Releases New 'Linked' Risk Model Covering Global Equities

Qontigo, an analytics and indices provider that is part of Deutsche Börse Group, will release its new risk model, the Axioma Worldwide Equity Linked Factor Risk Model, on December 3. The model aims to provide risk managers, portfolio managers, and asset owners with a nuanced view of their investments’ risk profiles by breaking down their risk exposures in different geographic regions, as opposed to offering closed-off singular views or too-broad global views.

The new model, which covers 46,900 securities with daily historical coverage back to 1997, links three existing equity factor-risk models—Axioma US, Developed Markets ex-US, and Emerging Market—which are all part of the Axioma line of analytics solutions. Currently, if a user were to use, say, just the Developed Markets ex-US model, they would get a risk assessment of their equity investments in all developed markets excluding the US, such as their European and Asian stock holdings. By combining the three models, users will receive a blended risk profile. 

“The art is in the combination of these models, where we can effectively recognize that banks in the US are not perfectly correlated with banks outside the US, or that value in the US may perform differently than value in emerging markets,” says Melissa Brown, head of applied research at Qontigo.

A linked model recognizes that factors such as an industry factor or a style factor, like size or value, are empirically not highly correlated—thus, regional risk assessments are often more insightful, but by their nature, exclude the rest of the world.

In the past, one could make the case that those who invested globally could use a model that looked at a risk on a global level because the world was reasonably integrated, Brown says. Perhaps it was a simplified assumption, but it wasn’t that uncommon to believe—correctly—that events in one corner of the world weren’t wildly different from those in another.

This year, she says, it’s become clear that, despite being in similar circumstances—dealing with a far-reaching pandemic and varying degrees of economic shutdown—markets in the US, Asia, Europe, and areas still emerging have their own unique characteristics that have experienced wide-ranging effects. For example, although the US market crashed in March, it soared to new heights fewer than nine months later. Others, like Europe, haven’t seen the same performance boost.

Take, for another instance, the technology sector. A global risk model can measure the tech industry as a monolith, or geographic models could measure tech stocks’ risk in each region disparately, but Qontigo’s method is designed around trying to provide managers and investors with a large universe of relevant correlations.

“The volatility of technology stocks in the US is different from the volatility of technology stocks outside the US,” Brown says. “They’re probably going to have a positive correlation, but it’s not going to be a correlation of one—which means that your technology bet in the US is going to have a different impact on your portfolio risk than your technology bet outside the US. That’s very helpful to know, whether you’ve got a fully global portfolio, or a US portfolio with a little bit that’s outside the US, or a European portfolio with a little bit of Asian influence—whatever it is.”

Apart from risk analysis, Brown sees other use-cases for the new model, including performance attribution and portfolio diversification.