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Research Insight - Benefits of Including Systematic Equity Strategy (SES) Factors - November 2013

In the MSCI Japan Equity Model (JPE4), we include some well-known Systematic Equity Strategies as risk factors (SES factors, for short). Incorporating these SES factors can help identify and measure risk in investment strategies typically used by fundamental and quantitative managers.  In this paper, we find that models including the SES factors produced more accurate risk forecasts for portfolios tilted toward those investment strategies. Furthermore, for optimized portfolios tilting on those strategies, we found that models including the SES factors exhibited slightly lower volatility out-of-sample than corresponding portfolios constructed without SES factors included in the risk model.