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FI400S Factor Model Validation

This document provides validation results for MSCI’s new fixed-income factor model (henceforth FI400S). Historical performance of FI400S is informed vis-à-vis quantitative and qualitative backtesting results. One feature of the analyses presented herein is that they were conducted with an emphasis on utilizing procedures that clients may replicate. To this end, underlying data for backtesting were sourced via client-accessible methods.

To test the various components of FI400S, portfolios with meaningful exposures to components of interest were used. Emphasis was placed on generating backtesting results that are relevant to investment processes; hence, fixed-income indexes were used when possible to construct testing portfolios.

As a point of reference for comparison, backtesting results for MSCI’s legacy covariance model (henceforth BIM303S) are also presented. Particular attention was given to cases for which BIM303S is indicated to have outperformed over FI400S. For detailed discussions of FI400S and BIM303S, interested readers are referred to Shepard and Zhou (2017), and DeMond, Phillips, Shepard, and Zhang (2015).