Transcription of Barra US Equity Model (USE4) Empirical Notes
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Barra US Equity Model (USE4) Empirical Notes
Model Insight The Barra US Equity Model (USE4) Empirical Notes Yang Liu Jose Menchero D. J. Orr Jun Wang September 2011 MSCI Portfolio Management Analytics 2011 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document RV May 2011 Model Insight USE4 Empirical Notes September 2011 2 of 62 Contents 1. Introduction .. 4 Model 4 2. Methodology Highlights .. 5 Optimization Bias Adjustment .. 5 Volatility Regime Adjustment .. 5 Country 6 Specific Risk Model with Bayesian Shrinkage .. 6 3. Factor Structure Overview .. 7 Estimation 7 Industry Factors .. 7 Multiple Industry Exposures .. 13 Style Factors .. 15 Performance of Select 17 4. Model Characteristics and Properties .. 22 Country and Industry Factors .. 22 Style Factors .. 25 Explanatory Power .. 27 Cross-Sectional Dispersion .. 28 Specific Risk .. 32 5. Forecasting 34 Overview of Testing Methodology .. 34 Backtesting Results.
is analogous to the World factor in the Barra Global Equity Model (GEM2), as described by Menchero, Morozov, and Shepard (2008, 2010). One significant benefit of the Country factor is the insight and intuition that it affords. For instance, as discussed in the USE4 Methodology Notes, the USE4 Country factor portfolio can be cleanly interpreted
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