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Barra Releases Short Term Risk Model
Nov 1, 1995
The Short Term Risk Model is designed to provide accurate daily risk forecasts. It is clear from the tests we have run that it is significantly better than U.S. E2 in the daily context. If we scaled the STRM daily risk predictions up to monthly risk predictions and compared with E2 monthly predictions we would expect to find that E2 provides better risk forecasts over a one-month horizon. Scaling the predicted risk by the quare root of the number of trading days to arrive at a risk prediction of a different time horizon is not valid. It assumes that daily returns are drawn from identical and independent distributions, which is not true in real markets. Because STRM is updated each trading day and is tuned to provide the most accurate daily risk forecast, it is a valuable tool for traders and money managers who need to control risk over a short time horizon.