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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.

2.4. Specific Risk Model with Bayesian Shrinkage The USE4 specific risk model builds upon methodological advances introduced with the European Equity Model (EUE3), as described by Briner, Smith, and Ward (2009). The EUE3 model utilizes daily observations to provide timely estimates of specific risk directly from the time series of specific returns.

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