Updated asset correlation model shows correlations subsiding from recent peak
Moody’s Analytics, a leader in enterprise risk management solutions, today announced the release of RiskFrontier 2.6, its portfolio management and economic capital calculation solution for banks, insurance companies, asset management firms and corporations. The update introduces Relative Risk Analysis, also known as Relative VaR Analysis, which allows risk managers to compare portfolio performance against a benchmark portfolio or index. Also included is GCorr 2010, an update to Moody’s Analytics forward-looking multi-factor asset correlation model. GCorr 2010 shows asset correlations subsiding from the levels observed over the past three years.
“Relative risk analysis gives portfolio managers a tool to measure the effectiveness of portfolio strategies not just in absolute terms but relative to a benchmark portfolio or index,” said Vanessa Wu, managing director of Portfolio Products at Moody’s Analytics. “This enhances the way clients can evaluate performance and monitor changes in risk.”
According to Philippe Tremblay, senior director, Credit and Liquidity Risk Management, at Caisse de Dépôt et Placement du Québec, one of the largest asset managers in North America, the new relative risk analysis functionality will allow them to better understand how the credit risk of their portfolios differs from the risk of their benchmark indices. “Ultimately, statistics like tracking error and relative value at risk are key to explaining to our depositors the difference between the portfolio and the benchmark indices’ return,” he said.
RiskFrontier 2.6 includes GCorr 2010, an update to Moody’s Analytics global asset correlation model, which includes the most recent correlation dynamics among corporate, SME, CRE and retail entities. GCorr 2010 indicates that corporate asset correlations will subside in 2011 from the levels observed over the past three years. This interpretation is consistent with the mean-reversion pattern in asset correlations—recent levels associated with the financial crisis were above the long-term trend and are therefore expected to decline. In addition, the range of asset correlations is expected to widen within many regions.
Risk Frontier 2.6 also features unlimited user-defined variables which allow users to track the performance of custom segments within and across portfolios and provides the ability to take and store portfolio snapshots—a key feature for tracking portfolio performance over time.
