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BlackRock’s Guide to
Fixed-Income Risk
Management
BlackRock’s Guide to
Fixed-Income Risk
Management

BENNETT W. GOLUB, Editor

Copyright © 2024 by BlackRock, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

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Library of Congress Cataloging-in-Publication Data:

Names: Golub, Bennett W., author. | John Wiley & Sons, publisher.
Title: BlackRock’s guide to fixed-income risk management / Bennett W.
Golub.
Description: Hoboken, New Jersey : Wiley, [2023] | Includes index.
Identifiers: LCCN 2023007920 (print) | LCCN 2023007921 (ebook) | ISBN
9781119884873 (hardback) | ISBN 9781119884897 (adobe pdf) | ISBN
9781119884880 (epub)
Subjects: LCSH: Financial risk management. | Fixed-income securities—Risk
management. | Investments—Risk management.
Classification: LCC HD61 .G644 2023 (print) | LCC HD61 (ebook) | DDC
658.15/5—dc23/eng/20230505
LC record available at https://lccn.loc.gov/2023007920
LC ebook record available at https://lccn.loc.gov/2023007921

Cover Design: Wiley and BlackRock

Cover Image: © Liyao Xie/Getty Images
“And, of course, stability isn’t nearly so spectacular as instability.”
∼Aldous Huxley, Brave New World
 Contents

Frequently Used Abbreviations xvii

Foreword xxi

Preface xxiii

Acknowledgments xxxi

SECTION I
An Approach to Fixed-Income Investment Risk Management 1
CHAPTER 1
An Investment Risk Management Paradigm 3
Bennett W. Golub and Rick Flynn
1.1 Introduction 3
1.2 Elements of Risk Management 4
1.3 BlackRock’s Investment and Risk Management Approach 6
1.4 Introduction to the BlackRock Investment Risk Management Paradigm 7
Notes 10

CHAPTER 2
Parametric Approaches to Risk Management 11
Bennett W. Golub and Leo M. Tilman
2.1 Introduction 11
2.2 Measuring Interest Rate Exposure: Analytical Approaches 12
2.2.1 Macaulay and Modified Duration and Convexity 12
2.2.2 Option-Adjusted Framework: OAV, OAS, OAD, OAC 19
2.2.3 Dynamic Nature of Local Risk Measures: Duration and
Convexity Drift 25
2.2.4 Interest Rate Scenario Analysis 26
2.3 Measuring Interest Rate Exposure: Empirical Approaches 30
2.3.1 Coupon Curve Duration 30
2.3.2 Empirical (Implied) Duration 31
2.4 Measuring Yield Curve Exposure 34
2.4.1 Key Rate Durations 34

vii
viii CONTENTS

2.5 Measuring and Managing Volatility Related Risks 40

2.5.1 Volatility Duration 40
2.5.2 Option Usage in Portfolio Management 43
2.6 Measuring Credit Risk 47
2.6.1 Spread Duration 47
2.6.2 Duration Times Spread (DxS) 49
2.7 Measuring Mortgage-Related Risks 50
2.7.1 Prepayment Duration 50
2.7.2 Mortgage/Treasury Basis Duration 51
2.8 Measuring Impact of Time 52
Notes 57

CHAPTER 3
Modeling Yield Curve Dynamics 59
Bennett W. Golub and Leo M. Tilman
3.1 Probability Distributions of Systematic Risk Factors 59
3.2 Principal Component Analysis: Theory and Applications 61
3.2.1 Introduction 61
3.2.2 Principal Components Analysis 65
3.2.3 The First Principal Component and the Term Structure of
Volatility 69
3.2.4 Example: Historical Steepeners and Flatteners of the US
Treasury Curve 73
3.3 Probability Distributions of Interest Rate Shocks 75
Notes 79

CHAPTER 4
Portfolio Risk: Estimation and Decomposition 81
Amandeep Dhaliwal and Tom Booker
4.1 Introduction 81
4.2 Portfolio Volatility and Factor Structure 83
4.3 Covariance Matrix Estimation 85
4.3.1 Weighting of Historical Data 86
4.3.1.1 Exponential Decay Weighting 86
4.3.1.2 Alternative Weighting Schemes and Stress Scenarios 87
4.3.1.3 Enhancing Volatility Responsiveness Dynamically 88
4.3.2 Asynchronicity 89
4.3.2.1 Overlapping Covariance Matrix 90
4.3.2.2 Newey-West Estimation 90
4.3.3 Factor Model Structure: Generalizations 91
4.3.3.1 Optimization of the Error-Bias Trade-Off 91
4.3.3.2 Misspecification and Omitted Covariation 92
4.3.4 Covariance Matrix Estimation: Summary and
Recommendations 92
4.4 Ex Ante Risk and VaR Methodologies 93
4.4.1 VaR Estimation Approaches 94
Contents ix

4.4.2 Enhanced HVaR 98

4.4.2.1 EHVaR Systematic Risk Methodology 99
4.4.2.2 EHVaR Idiosyncratic Risk Methodology 101
4.4.3 VaR Estimation: Summary 102
4.5 Introduction to Risk Decomposition 103
4.6 Alternative Approaches to Risk Decomposition 104
4.6.1 A Comparison of the Different Approaches 106
4.7 Risk Decomposition Using CTR 108
4.7.1 Security-Level Contributions and Aggregations 108
4.7.2 Factor-Level Contributions and Aggregations 109
4.7.3 Decomposing Contribution to Risk into Atomic Contributions 111
4.7.4 Decomposing Contribution to Risk into Exposure, Volatility,
and Correlation 113
4.7.5 Decomposing Contribution to Risk Using ANOVA 114
4.8 Risk Decomposition Through Time 116
4.9 Risk Decomposition: Summary 119
Appendix A. EHVaR: Idiosyncratic Risk Estimation 119
Appendix B. EHVaR: Aggregation 122
Notes 123

CHAPTER 5
Market-Driven Scenarios: An Approach for Plausible Scenario Construction 125
Bennett W. Golub, David Greenberg, and Ronald Ratcliffe
5.1 Introduction 125
5.2 Implied Stress Testing Framework 127
5.2.1 Market-Driven Scenario Framework 127
5.2.2 Scenario Likelihood 128
5.2.3 From Likelihood to Probability 129
5.2.4 Decomposing the Scenario Z-Score 131
5.2.5 Specifying a Covariance Matrix 133
5.3 Developing Useful Scenarios 134
5.3.1 Scenario Definition 134
5.4 A Market-Driven Scenario Example: Brexit 136
5.4.1 Describing Different Brexit Scenario Outcomes 136
5.4.2 Identifying Key Policy Shocks in Soft Brexit Scenario 137
5.5 Conclusion 142
Appendix: Decomposition of Scenario Z-Score 143
Notes 143

CHAPTER 6
A Framework to Quantify and Price Geopolitical Risks 145
Catherine Kress, Carl Patchen, Ronald Ratcliffe, Eric Van Nostrand, and Kemin Yang
6.1 Introduction 145
6.2 Setting the Scene 146
6.2.1 Short and Sharp 147
6.2.2 Shades of Gray 148
x CONTENTS

6.3 BlackRock’s Framework for Analyzing Geopolitical Risks 149

6.4 Global Trade Deep Dive 149
6.4.1 Calibrating the Shocks 150
6.5 What Is Already Priced In? 153
6.5.1 Is It Priced In? 154
6.5.2 Adjusted Impacts 154
6.5.3 Assessing Likelihood 155
6.5.4 Takeaways 156
6.6 Taking Action 156
6.6.1 Key Drivers 157
6.6.2 BGRI-Specific Assets 157
6.6.3 The Path Forward 158
6.7 Caveats and Cautions 159
Notes 159

CHAPTER 7
Liquidity Risk Management 163
Bennett W. Golub, Philip Sommer, Stefano Pasquali, Michael Huang, Kristen
Walters, and Nikki Azznara
7.1 Introduction 163
7.2 A Brief History of Liquidity Risk Management 164
7.3 A Fund Liquidity Risk Framework 166
7.4 Asset Liquidity 166
7.4.1 Importance of Data Modeling for Liquidity Risk Management 166
7.4.2 Asset Liquidity: Days-to-Liquidate 168
7.4.3 Asset Liquidity: Corporate Bond Transaction Costs (T-Costs) 169
7.5 Redemption Risk 169
7.5.1 Managing Redemptions and Outflow Risk 170
7.6 Liquidity Stress Testing 170
7.7 Extraordinary Measures 171
7.8 Fixed-Income Data Availability Limitations 171
7.8.1 Modeling Asset Liquidity 173
7.8.2 Modeling Redemption-at-Risk 177
7.8.3 Modeling Liquidity Optimization 178
7.9 Conclusion 181
Notes 181

CHAPTER 8
Using Portfolio Optimization Techniques to Manage Risk 183
Alex Ulitsky, Bennett W. Golub, Leo M. Tilman, and Jack Hattem
8.1 Risk Measurement Versus Risk Management 183
8.2 Typical Fixed-Income Hedges 185
8.3 Parametric Hedging Techniques 187
8.4 Generalized Approach to Hedging 189
8.4.1 Hedging as Constrained Portfolio Optimization 189
Contents xi

8.4.2 Mathematical Formulation 190

8.4.2.1 Exposure Hedging 191
8.4.2.2 Managing a Portfolio Against a Benchmark 196
8.4.2.3 Stress Scenario Hedging 199
8.4.3 Examples of Optimized Risk Management Strategies 201
8.4.3.1 Creating an ESG Tilt While Managing a Fixed-Income
Portfolio Relative to a Benchmark 201
8.4.3.2 Hedging Stress Scenario Exposure 203
8.5 Advanced Portfolio Optimization and Risk Management Techniques 207
8.5.1 Risk Budgeting/Parity 208
8.5.2 Going Beyond a Single Fund/Single Period in Portfolio Risk
Management 210
8.5.2.1 Multi-Fund Portfolio Construction and Risk Management 211
8.5.2.2 Multi-Period Portfolio Construction and Risk Management 211
8.5.2.3 Risk Management Using Scenario Optimization 212
8.5.3 Example: Risk Budgeting for Factor-Based Investing 213
Notes 215

CHAPTER 9
Risk Governance 219
Bennett W. Golub
9.1 Introduction 219
9.2 Risk Scan Standard Framework 219
9.3 Risk and Performance Target (RPT) Framework 221
9.4 Governance 223
Notes 224

CHAPTER 10
Risk-Return Awareness and Behavioral Finance 225
Emily Haisley and Nicky Lai
10.1 Introduction 225
10.2 Portfolio and Risk Manager Partnership 226
10.3 Behavioral Risk Management for Fixed Income 227
10.4 Decision-Making Analytics 229
10.4.1 Loss Aversion 229
10.4.1.1 The Disposition Bias 230
10.4.1.2 The Endowment Effect 232
10.5 Investment Process 235
10.5.1 Leveraging the Wisdom of the Crowds 236
10.5.2 Bolster System II Thinking 238
10.5.3 Facilitate Continuous Learning 239
10.6 Conclusion 241
Notes 242
xii CONTENTS

CHAPTER 11
Performance Attribution 243
Reade Ryan and Carol Yu
11.1 Introduction 243
11.2 Brinson Attribution and Beyond 244
11.2.1 Comparing Market Value Brinson Attribution to Beta-Adjusted
Attribution 250
11.3 Factor-Based Attribution 252
11.4 Equity Fundamental Factor-Based Attribution 256
Notes 258

CHAPTER 12
Performance Analysis 259
Mark Paltrowitz, Mark Temple-Jones, Viola Dunne, and Christopher Calingo
12.1 Introduction 259
12.2 Performance Governance 260
12.3 Performance Metrics 260
12.3.1 Active Performance Measurement 260
12.3.1.1 Alpha Target Ratio 261
12.3.1.2 Weighted Peer Percentile 262
12.3.1.3 Strengths and Weaknesses of the ATR and Weighted Peer
Percentile 262
12.3.1.4 Alpha Dollars 263
12.3.1.5 Strengths and Weaknesses of Alpha Dollars 264
12.3.2 Index Performance Metrics 265
12.3.2.1 Direct Tracking Basis Points (BP) 265
12.3.2.2 Strengths and Weaknesses of Direct Tracking BP 265
12.4 Conclusion 266
Notes 266

CHAPTER 13
Evolving the Risk Management Paradigm 267
Bennett W. Golub, Michael Huang, and Joe Buehlmeyer
13.1 Introduction 267
13.2 Traditional Buy-Side Risk Management Framework 268
13.3 Evolving the IRMP: In Pursuit of Investment Risk Management at Scale 268
13.4 Risk Governance 270
13.5 Supporting Risk Governance Through Technology 270
13.6 Implementing a Risk Governance Framework Through Aladdin 271
13.7 Aladdin’s Risk Radar Example 271
13.7.1 Aladdin’s Risk Radar Overview 271
13.7.2 Rules and Portfolio Subscriptions 272
13.7.3 Exceptions and Tasks 272
13.7.4 Exception Classification 274
13.7.5 Risk Exception Reporting and Audit 274
13.7.6 What Is Next for Technology-Enabled Investment Risk
Oversight? 274
13.8 Conclusion 276
Notes 276
Contents xiii

SECTION II
Fixed-Income Risk Management—Then and Now 277
CHAPTER 14
The Modernization of the Bond Market 279
Daniel Veiner, Stephen Laipply, Carolyn Weinberg, Samara Cohen, Vasiliki
Pachatouridi, and Hui Sien Koay
14.1 Charting the Evolution of Bond Markets 279
14.1.1 The Current State of Bond Market Liquidity 279
14.1.2 The Modernization of Bond Market Structure 281
14.1.3 Continued Growth in Electronic Bond Trading 283
14.2 The Development of an Index-Based Ecosystem 285
14.2.1 Fixed-Income ETFs: Continued Strong Growth and Adoption 285
14.2.2 Portfolio Trading and Fixed-Income ETFs 286
14.2.3 Continued Growth in Bond Index Derivatives Markets 288
14.2.4 Fixed-Income ETF Options 288
14.3 Implications for Investing, Portfolio Management, and Risk
Management 289
14.3.1 Use Cases for Fixed-Income ETFs and Other Index Exposures 289
14.4 The Future State of Portfolio Construction 290
14.4.1 Portfolio Engineering and Construction 290
14.5 Conclusion 290
Notes 291

CHAPTER 15
The LIBOR Transition 293
Jack Hattem
15.1 Introduction 293
15.2 Implications to Portfolio and Risk Management 295
15.3 Shift from LIBOR to SOFR 295
15.4 Risk Management Impact and Coordination 297
15.5 Reflections on a Benchmark Reforms 298
Notes 300

CHAPTER 16
Derivatives Reform: The Rise of Swap Execution Facilities and Central Counterparties 301
Eileen Kiely and Jack Hattem
16.1 The Call for Change: 2008 Global Financial Crisis 301
16.1.1 SEFs 302
16.1.2 CCPs 302
16.2 The Value of Derivatives in Fixed-Income Portfolios 302
16.3 Trading Fixed-Income Derivatives: The Rise of SEFs 304
16.4 Clearing Fixed-Income Derivatives: The Rise of CCPs 305
16.5 CCP Risk Mitigation Techniques 306
16.5.1 CCP Risk Mitigation Techniques: What Could Go Wrong? 308
16.6 The Call for Change: Market Participants Ask for Stronger CCPs 308
16.7 Conclusion 311
Notes 311
xiv CONTENTS

SECTION III
Lessons from the Credit Crisis and Coronavirus Pandemic 313

CHAPTER 17
Risk Management Lessons Worth Remembering from the Credit Crisis of 2007–2009 315
Bennett W. Golub and Conan Crum
17.1 Introduction 315
17.2 The Paramount Importance of Liquidity 316
17.2.1 Price ≠ Intrinsic Value Unless Special Conditions Hold 317
17.2.2 Cash and Cash Flow Are the Only Robust Sources of Liquidity 319
17.2.3 Complexity and Opacity Matter More Than You Think 321
17.2.4 Collateralization Can Be a Two-Edged Sword 322
17.2.5 Liquidity Is a Common Risk Factor 324
17.3 Investors in Securitized Products Need to Look Past the Data to the
Underlying Behavior of the Assets 326
17.4 Certification Is Useless During Systemic Events 331
17.5 Market Risk Can Change Dramatically 332
17.6 The Changing Nature of Market Risk 336
17.7 By the Time a Crisis Strikes, It’s Too Late to Start Preparing 337
17.8 Conclusion 338
Notes 338

CHAPTER 18
Reflections on Buy-Side Risk Management After (or Between) the Storms 341
Bennett W. Golub and Conan Crum
18.1 Introduction 341
18.2 Risk Management Requires Institutional Buy-In 341
18.3 The Alignment and Management of Institutional Interests 342
18.4 Getting Risk Takers to Think Like Risk Managers 345
18.5 Independent Risk Management Organizations 345
18.6 Clearly Define Fiduciary Obligations 347
18.7 Bottom-Up Risk Management 348
18.8 Risk Models Require Constant Vigilance 349
18.9 Risk Management Does Not Mean Risk Avoidance 350
Notes 350

CHAPTER 19
Lessons Worth Considering from the COVID-19 Crisis 353
Barbara Novick, Joanna Cound, Kate Fulton, and Winnie Pun
19.1 Introduction 353
19.2 Background 354
19.3 Core Principles Underpinning Recommendations 354
19.4 March 2020: Capital Markets Highlights and Official Sector
Intervention 355
19.5 COVID-19 Lessons: What Worked and What Needs to be Addressed 357
Contents xv

19.6 Recommendations to Enhance the Resilience of Capital Markets 363

19.6.1 Recommendations Regarding Bank Regulations 363
19.6.2 Recommendations Regarding Market Structure 364
19.6.2.1 Treasuries 365
19.6.2.2 Short-Term Markets 365
19.6.2.3 Fixed-Income Markets 365
19.6.2.4 Central Clearing Counterparties (CCPs) 365
19.6.2.5 Equities 366
19.6.2.6 Indices 366
19.6.2.7 Data 366
19.6.3 Recommendations Regarding Asset Management 366
19.7 Concerns with Macroprudential Controls 368
19.8 Conclusion 369
19.9 Postscript 369
Notes 370

Bibliography 373

About the Website 383

About the Editor 385

About the Contributors 387

Index 391
 Frequently Used Abbreviations

ABS Asset-Backed Securities

ADV Average Daily Volume
ANOVA Analysis of Variance
AP Authorized Participant
APG Aladdin Product Group
ARRC Alternative Reference Rates Committee
ARRs Alternative Reference Rates
ATM At-the-Money or Automated Teller Machine
ATR Alpha Target Ratio
AUM Assets Under Management
AVaR Analytical VaR
BGRI BlackRock Geopolitical Risk Indicator
BLK BlackRock
BoE Bank of England
BP Basis Point
BSRMF Buy Side Risk Managers Forum
BWIC Bids Wanted in Competition
CCD Coupon Curve Duration
CCost Cost of Carry
CCP Central Counterparty
CDF Cumulative Distribution Function
CDS Credit Default Swap
CDX Credit Default Swap Index
CIO Chief Investment Officer
CLO Collateralized Loan Obligation
CM Clearing Member
CMBS Commercial Mortgage-Backed Securities
CMRA Capital Market Risk Advisors
CP Commercial Paper
CPR Conditional Prepayment Rate
CRO Chief Risk Officer
CSA Collateral Support Agreement
CTF Collective Trust Fund
CTR Contribution to Risk
CVaR Conditional VaR

xvii
xviii FREQUENTLY USED ABBREVIATIONS

DxS Duration Times Spread

EHVaR Enhanced HVaR
EM Emerging Markets
EMH Efficient Market Hypothesis
ERM Exchange Rate Mechanism
ES Expected Shortfall
ESG Environmental, Social, and Governance
€STR Euro Short-Term Rate
ETD Exchange-Traded Derivative
ETF Exchange-Traded Fund
ETP Exchange-Traded Product
EWMA Exponentially Weighted Moving Average
FCA Financial Conduct Authority
FCM Futures Commission Merchant
FINRA Financial Industry Regulatory Authority
FSB Financial Stability Board
FSOC Financial Stability Oversight Council
FX Foreign Exchange
GDP Gross Domestic Product
GFC Global Financial Crisis
GNMAII MBS Ginnie Mae Mortgage-Backed Security
HF Hedge Fund
HRaR Historical Redemption-at-Risk
HROR Horizon Rate of Return
HVaR Historical VaR
HY High Yield
IBORs Interbank Offered Rates
ICTR Incremental Contribution to Risk
IG Investment Grade
IM Initial Margin
IMA Investment Management Agreement
IOSCO International Organization of Securities Commissions
IR Information Ratio
IRMP Investment Risk Management Paradigm
ISDA International Swaps and Derivatives Association
ITM In-the-Money
ITRM Idiosyncratic Tail Risk Multiplier
KRBC Key Rate Bucket Convexities
KRD Key Rate Duration
LCR Liquidity Coverage Ratio
LDI Liability-Driven Investment
LIBOR London Interbank Offered Rate
LTV Loan to Value
LVNAV Low Volatility Net Asset Value
MBS Mortgage-Backed Securities
MCTR Marginal Contribution to Risk
Frequently Used Abbreviations xix

MD Mahalanobis Distance
MDS Market-Driven Scenario
MiFID II Markets in Financial Instruments Directive
MMF Money Market Fund
MPO Multi-Period Optimization
MRAC Market Risk Advisory Committee
MSQE Mean-Squared Error
MTB Mortgage/Treasury Basis
MWCB Market Wide Circuit Breaker
NAV Net Asset Value
NBFI Non-Bank Financial Intermediation
OAC Option-Adjusted Convexity
OAD Option-Adjusted Duration
OAS Option-Adjusted Spread
OAV Option-Adjusted Value
OCC Office of the Comptroller of the Currency
OIS Overnight Index Swaps
OLS Ordinary Least Squares
OTC Over-the-Counter
OTM Out-of-the-Money
OTR On-the-Run
OTS Office of Thrift Supervision
OWIC Offers Wanted in Competition
P&L Profit and Loss
PCA Principal Components Analysis
PEPP Pandemic Emergency Purchase Programme
PFMI Principles for Financial Market Infrastructure
PQD Public Quantitative Disclosure
PROC Portfolio Risk Oversight Committee
PRV Purchase Redemption Value
PTF Proprietary Trading Firm
REITs Real Estate Investment Trusts
RFQ Request for Quote
RFR Risk-Free Rates
RPT Risk and Performance Targets
RQA Risk & Quantitative Analysis
SAR Standalone Risk
SARON Swiss Average Rate Overnight
SEC Securities and Exchange Commission
SEF Swap Execution Facility
SOCP Second Order Conic Programming
SOFR Secured Overnight Financing Rate
SONIA Sterling Overnight Index Average
SPACs Special Purpose Acquisition Companies
xx FREQUENTLY USED ABBREVIATIONS

STRM Systematic Tail Risk Multiplier

T-cost Transaction Cost
TONA Tokyo Overnight Average Rate
TRACE Trade Reporting and Compliance Engine
TRS Total Return Swaps
TSOV Term Structure of Volatility
TSY Treasury
UCITS Undertakings for Collective Investment in Transferable Securities
UMBS Uniform Mortgage-Backed Securities
UST US Treasury
VaR Value at Risk
VM Variation Margin
WFH Work from Home
WoW Week-over-Week
ZV0 Zero Volatility Spread
 Foreword

ack in the distant days of the mid-1980s I began my career focused on equity markets.
B Over the next two decades, the abundance of price and volume data, along with the rel-
atively limited set of variables required to describe equity risk, led to the development of
fundamental and statistical equity risk models that are now ubiquitous across the asset man-
agement industry.
In due course it became obvious to me that in order to understand investment risk in all
its forms, some knowledge of fixed-income markets and products was also necessary. Many
years before my association with BlackRock, I came across a book, Risk Management:
Approaches for Fixed Income Markets (2000) by Bennett W. Golub and Leo M. Tilman.
I remember reading it with some fascination. The statistical constructs were, at least in
part, similar to those used in equity markets. However, the markets themselves were very
different. Nonetheless, the rigor of the discussions and the practicality of the contents were
incredibly useful to me back then.
Some years later Ben Golub and I became colleagues when BlackRock acquired
Merrill Lynch Investment Management, where I was then the head of its Risk & Quan-
titative Analysis group in London. This brought me for the first time into contact with
BlackRock’s fixed-income analytics and risk management teams. My equities background
combined with BlackRock’s fixed-income expertise made for a good match, and I was
appointed the co-head with Ben Golub of a merged Risk & Quantitative Analysis group.
Over the subsequent 16 years, much has taken place in both markets and risk man-
agement. The contrasts between equities and fixed-income investing were, in many respects,
palpable. Some of the characteristics of fixed-income securities became clearer to me, such as
the limited trading and even more limited price data, the lags in the availability of the limited
amount of pricing data, the astounding number of individual securities, and the nonstandard
terms and conditions of securities. Real-world risk management meant making necessary
compromises from the equity ideal.
Currently, changes and reforms are moving fixed-income markets somewhat closer to
the more idealized equity markets, making certain types of analyses that were routine in the
equity markets partially available for fixed-income securities.
The last 16 years have also contained some major market events, including the Global
Financial Crisis and the Coronavirus pandemic, that challenged the notion that even exchange
markets operate efficiently all the time. Some of the later chapters in this book that focus on
financial crises contain lessons that we learned that are genuinely worth remembering.
This book introduces the notion of an Investment Risk Management Paradigm (IRMP).
This is particularly useful as a reminder of the need to enforce consistent levels of rigor across
all of the firm’s investment processes. Having a formal notion of this standardization has been
extremely useful, especially when investment processes change or activities are added.
History will not be kind to some notions of risk management that turn out to be for-
malized manifestations of self-delusion. Other analytics or frameworks will better last the

xxi
xxii FOREWORD

test of time. But while I am certain that some of the notions described in this book will
eventually need to change, just as many were eventually edited out of the first edition, many
will stand the test of time. This book presents techniques and practices that are actually used
and are actually useful. I recommend it to investors and risk managers who wish to get an
insight into how investment risk management is contemporaneously practiced at a major
global multi-investment process asset manager.

Ed Fishwick
Chief Risk Officer
BlackRock, Inc.
Summer 2023
 Preface

hanging market dynamics, technological advances, and geopolitical stresses have trans-
C formed investment risk management. As new and bespoke products have emerged, new
risks and additional complexities have driven advances in risk management processes and
analytics. Consider, for example, all the forced and rapid innovations that arose from the
Coronavirus pandemic. Given the abundance of change, risk managers have had to adapt
their processes and tools to address market turbulence, structural bond market changes, prod-
uct complexity, and increased regulatory oversight. Additionally, risk managers have learned
to take advantage of some of these technological advances, resulting in better analytics and
the ability to analyze bigger and broader data sets. An intellectually curious risk management
culture, coupled with rigorous risk management processes and technological competence,
facilitates risk managers’ ability to rapidly and effectively adapt to new circumstances.
Recognizing the dynamic nature of investment risk management informs us that it is
almost certain that some of the ideas and methodologies presented in this book will inevitably
become obsolete themselves. Similarly, there inevitably are important omissions, either inten-
tionally due to the limitations of time or are outside the wisdom and firsthand knowledge of
the authors.
This book is a heavily edited and expanded edition of Risk Management: Approaches
for Fixed Income Markets (2000) by Bennett W. Golub and Leo M. Tilman (the first edition).
In the 23 years following the original English language publication, much has happened to
reshape the investment risk management landscape. For example, the heightened attention
by markets and investors to ESG (environmental, social, and governance) characteristics was
never envisioned when the original book was published. The definitive book on ESG risk man-
agement has probably not been written yet; this book intentionally omits much of that topic,
while the profession awaits a conclusive state-of-the-practice volume. Also, while currently a
hot topic and one that certainly has demonstrated the ability to generate multiple risk man-
agement failures, this book is intentionally silent on the risk management of cryptocurrencies;
we await those markets’ risk management processes maturing.
The technological intensity of investment risk management has increased dramatically.
Twenty-three years ago, technology was not necessarily at the forefront of most investment
management firms. Now, technology is one of the critical success factors—allowing firms to
continue to evolve to meet clients’ needs, respond to market changes and regulatory require-
ments, and create operational efficiencies and scale. With improvements in technology, firms
are now able to perform tasks that were previously technologically impossible or would take
too much time or too much expensive hardware to be useful. When editing sections of the
original book for inclusion in this new edition, references to analytic techniques that involved
compromising accuracy for computational efficiency were removed from the manuscript;
there is much less need to compromise precision for the sake of economizing computa-
tional resources. The implications of Moore’s Law, broadly speaking, continue to make more
and more computational resources economical. Cloud-based applications, for example, can
summon massive amounts of computational power on demand. Organizations can store,

xxiii
xxiv PREFACE

analyze, manipulate, and synthesize what would have been unimaginable amounts of data
more cheaply and quickly than ever before. The sophisticated and creative use of technol-
ogy, has become an essential part of effective investment risk management. Having the right
technology to manage risk is no longer a luxury; it is a necessity.
BlackRock’s commitment to innovation and the use of technology has been one of the
key drivers of its ongoing robust growth. Developing and evolving Aladdin and leveraging
technology has been part of BlackRock’s founding vision and has enabled the firm to become
a massive scale operator, highly efficient, integrated, and dynamic. As the firm grows and
technology evolves, Aladdin continues to be a best-in-class solution, used by BlackRock to
operate efficiently at scale. The same Aladdin technology used by BlackRock is also available
and heavily used by many major global financial institutions.
The motivation for this book originated due to an inquiry from a BlackRock client about
when the first edition would be revised. Initially, this seemed to be a relatively straightforward
task, and the project was initiated in 2017. At first, the plan was to update data, tables,
and exhibits and remove topics that were no longer relevant. However, after this editing
process, it became apparent that simply updating the data and removing obsolete sections
would be sorely inadequate given how much markets, products, and risk management have
evolved. Instead, it became clear that if the original book were to be properly updated, a
substantial expansion of the topics covered would be required. That, of course, made creating
the second edition a materially greater task. Given my then current role as chief risk officer of
BlackRock, this task would have been beyond my ability to complete. In 2018, I concluded
that if we expanded the scope of the book, the only feasible path forward was to ask my fellow
BlackRock colleagues to contribute their expertise and enthusiasm and author or coauthor
the needed chapters. Unlike the original book, which was written as a unified whole in a
single voice, the new edition would include chapters on a wide range of topics written by
many authors.
Bringing together BlackRock’s leaders in risk management, portfolio management, trad-
ing, financial modeling, psychology, and analytics, this successor book to the first edition,
now titled BlackRock’s Guide to Fixed-Income Risk Management, represents a combination
of revised and updated chapters from the original book and a collection of new standalone
chapters covering a range of investment risk management topics. Each chapter has been
authored by BlackRock’s current or former senior subject matter experts. While the book
focuses primarily on fixed-income practices, analytics, and models, many of the concepts
presented are equally meaningful in a multi-asset context. This book can first be considered a
practitioner’s guide to fixed-income risk management, leveraging BlackRock’s overall invest-
ment risk management framework for operating a viable risk management program at scale,
heterogeneity, and complexity.

ORGANIZATION OF THE BOOK1

This book is organized into three sections and covers the following themes:

(I) An Approach to Fixed-Income Investment Risk Management

(II) Fixed-Income Risk Management—Then and Now
(III) Lessons from the Credit Crisis and Coronavirus Pandemic
Preface xxv

SECTION I: AN APPROACH TO FIXED-INCOME INVESTMENT RISK

MANAGEMENT

In Section I, we describe the pillars of BlackRock’s Investment Risk Management Paradigm

(IRMP). This paradigm evolved over many years as a tool to bring consistency and structure
to BlackRock’s risk management activities across its various investment management busi-
nesses to ensure that risks are properly identified, measured, governed, and reconciled with
actual performance. The IRMP rests upon on the following five pillars:

1. Ex ante risk measurement

2. Risk governance (i.e., having and maintaining agreed upon levels of risks)
3. Portfolio manager risk-return awareness
4. Performance attribution
5. Performance analysis

Each component of the paradigm is discussed in detail in one or more of the following
chapters. Given the various risks to which portfolios are exposed and the diversity of mea-
surements available, several chapters expand upon the first pillar, ex ante risk measurement.
Examples and case studies are incorporated to help illustrate the risk management approaches
and analytics presented.
Chapter 1 provides an overview of risk management at BlackRock and discusses sev-
eral elements that underpin a strong risk management program. The chapter reinforces the
importance of governance and oversight and introduces BlackRock’s approach to invest-
ment risk management. To be clear, though, establishing a comprehensive and pervasive risk
management program and culture requires commitment and support from all levels of an
organization, starting with senior management. My colleagues and I were fortunate to be
able to develop our ideas and methodologies in such an environment. This chapter was coau-
thored by myself and Rick Flynn, managing director in the Risk & Quantitative Analysis
group.
Chapter 2 presents parametric approaches to risk management and was initially included
in the first edition. This chapter aligns with the first pillar of BlackRock’s IRMP, ex ante risk
measurement. This chapter includes a discussion of analytical and empirical durations, partial
durations, interest rate scenario analysis, and horizon rate of return analysis. The parametric
measures of market risk continue to form the backbone of more elaborate and compressive
risk methodologies and techniques, which is why we felt that it was an important chapter
to revisit and revise in this edition. This chapter has been updated with more recent data. It
also includes additional concepts, such as duration times spread (DxS), authored by David
Greenberg, former managing director in Technology & Operations—Artificial Intelligence
(AI) Labs. Additionally, we added a new section on option usage in portfolio management,
which was authored by Jack Hattem, managing director in the Portfolio Management Group.
Yury Krongauz, managing director in the Financial Modeling Group, included additional
details regarding wave shocks to the Key Rate Duration section. This chapter was updated by
Matthew Wang, managing director in the Fundamental Fixed Income Portfolio Management
Group.
Chapter 3 reviews the dynamics of interest rate shocks and was also previously published
in the first edition. The concepts in this chapter are also part of the first pillar of BlackRock’s
xxvi PREFACE

IRMP and contain an introduction to principal component analysis as well as an investigation

of the probability distribution of interest rate shocks. In this chapter, the relationship between
the first principal component and the term structure of volatility is explored and the results
are applied to the study of big market move days as well as the historical steepeners and
flatteners of the US Treasury curve. This chapter was updated by Matthew Wang.
Chapter 4 focuses on estimating and decomposing portfolio risk and also aligns with
the first pillar of BlackRock’s IRMP. This chapter reviews portfolio volatility estimation and
factor structure, along with the empirical challenges associated with estimating covariance
matrices. It contains an overview of Value at Risk (VaR) estimation, including a focus on
Enhanced Historical VaR (EHVaR), which is a proprietary approach developed for modeling
the forward distribution of asset returns. EHVaR blends the advantages of both parametric
and nonparametric forecasting techniques. Finally, the chapter discusses decomposition of
realized risk and return. This chapter was coauthored by Amandeep Dhaliwal, managing
director in the Financial Modeling Group, along with Tom Booker, director in the Financial
Modeling Group.
Chapter 5 introduces the Market-Driven Scenarios (MDS) framework, which is designed
to provide structure to the often subjective and ad hoc nature of hypothetical scenario gener-
ation. Macroeconomic fundamentals typically drive the general direction of financial market
returns. However, tail risks, which can be triggered by geopolitical events, can arise that are
difficult to forecast but can have significant adverse effects on fund returns. As an element
of the first pillar, this chapter highlights the use of specific econometric techniques and the
application of a disciplined multistep process to create Market-Driven Scenarios. The MDS
process is inherently multi-asset versus being particularly fixed-income oriented. This chapter
was coauthored by myself, David Greenberg, and Ronald Ratcliffe, managing director in the
Analytics & Quantitative Solutions team within BlackRock Solutions.
Chapter 6 uses the MDS framework to analyze geopolitical risks and assess their potential
market impact in a systematic way. The chapter reviews market responses to unexpected
historical geopolitical shocks from 1962–2019. Using one of the top geopolitical risks from
2019 as an example, this chapter demonstrates the application of the MDS framework. This
chapter aligns with the first pillar of the IRMP and reinforces the importance of scenario
analysis and stress testing portfolios. It was coauthored by Catherine Kress, director and head
of Geopolitical Research & Strategy within the BlackRock Investment Institute; Carl Patchen,
former vice president in the Risk & Quantitative Analysis group; Ronald Ratcliffe; Eric Van
Nostrand, former managing director in the BlackRock Sustainable Investment group; and
Kemin Yang, former associate in the BlackRock Investment Institute. Additional contributors
include myself, Tom Donilon, chairman of the BlackRock Investment Institute; and Isabelle
Mateos y Lago, global head of BlackRock’s Official Institutions group.
Chapter 7 presents some approaches for measuring liquidity risk, one of the many invest-
ment risks that demands rigorous and continuous oversight. While liquidity risk can have
different meanings, this chapter focuses on fund liquidity risk. As a component of the first
pillar, this chapter contains a brief history of how liquidity risk management has evolved
and covers the various elements of a liquidity risk management framework, including asset
liquidity, redemptions, and extraordinary measures. This chapter was coauthored by myself;
Philip Sommer, director in the Liquidity & Trading Research Group within BlackRock Solu-
tions; Stefano Pasquali, head of the Liquidity & Trading Research Group within BlackRock
Solutions; Michael Huang, managing director in the Risk & Quantitative Analysis group;
Kristen Walters, former managing director in the Risk & Quantitative Analysis group; and
Nikki Azznara, vice president in the Portfolio Management Group.
Preface xxvii

Chapter 8 presents approaches for managing market risk in fixed-income portfolios using
portfolio optimization techniques. An earlier version of this chapter was previously included
in the first edition. However, it has been significantly updated and transformed to reflect new
approaches for optimization, including many that are also applicable to multi-asset port-
folios. The chapter begins with a discussion of the differences between risk measurements
versus risk management and covers typical fixed-income hedges. Then, the chapter transitions
to discuss parametric hedging techniques, generalized approaches to hedging, and advanced
portfolio optimization and risk management techniques. Various examples are included in the
chapter to demonstrate how optimization approaches can be utilized in different situations.
This chapter does not necessarily align uniquely with a specific IRMP pillar. Rather, portfolio
optimization is a powerful and versatile tool that allows portfolios to be engineered for a
variety of reasons. This chapter was primarily authored by Alex Ulitsky, managing director
in the Financial Modeling Group. Jack Hattem provided significant updates to this chapter.
Chapter 9 introduces the second pillar, risk governance, and also introduces the concept
of risk scans to identify potential risk issues. Specifically, properly designed risk and exposure
scans can flag portfolios and positions that may not align with client objectives or expec-
tations. Given the increasing size and heterogeneity of investment processes and products,
risk managers need to efficiently analyze a multitude of portfolios. This chapter presents a
basic univariate risk scan framework that uses simple algorithms to identify potential risk
exceptions—what came to be known at BlackRock as Risk and Performance Targets (RPT).
I was the primary author of this chapter. Rory van Zwanenberg, director in the Risk &
Quantitative Analysis group, significantly contributed to this chapter, along with Katie Day,
managing director in the Risk & Quantitative Analysis group.
The third pillar, portfolio manager risk-return awareness, focuses on the relationship
between portfolio and risk managers. Chapter 10 discusses the importance of risk managers
working together with portfolio managers to ensure that risks are properly detected, under-
stood, and then appropriately managed for clients. Effective risk management requires regular
interaction with portfolio managers to discuss risk positioning and can include identifying
potential adverse behavioral aspects of investing. The chapter concentrates on behavioral
finance, an evolving risk management domain, which seeks to identify cognitive blind spots
that can impact investment decisions. The chapter includes details on decision-making analyt-
ics such as loss aversion, disposition bias, and the endowment effect. The chapter also includes
a framework for evaluating behavioral aspects of the investment processes. This chapter was
coauthored by Emily Haisley, managing director of the behavioral finance initiatives in the
Risk & Quantitative Analysis group, and Nicky Lai, director in the Risk & Quantitative
Analysis group.
The fourth pillar, performance attribution, decomposes investment returns into their
sources of performance, providing portfolio and risk managers with an understanding of
the drivers of investment results. Chapter 11 covers approaches and analytical techniques
that practitioners can leverage to conduct performance attribution, including Brinson and
factor-based methodologies. The chapter provides multiple examples to demonstrate how
portfolio returns can be viewed and interpreted. This chapter was coauthored by Reade Ryan,
managing director in the Risk & Quantitative Analysis group, and Carol Yu, former vice
president in the Risk & Quantitative Analysis group.
The fifth pillar, performance analysis, presents a framework to review a portfolio’s
realized performance relative to its benchmarks, peers, and other comparable accounts.
Chapter 12 discusses how to meaningfully measure aggregate platform performance,
especially across a heterogeneous set of funds with different benchmarks and risk and per-
formance targets. The chapter covers active performance metrics, such as alpha target ratio,
Another random document with
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 CHAPTER II
THE DEVELOPMENT OF THE AIRSHIP

Before free balloons were successfully motor driven and steered,

stern necessity had pressed them into the service of war. During the
siege of Paris, in 1870, when the Parisians were cut off from all
means of escape, there were only a few balloons in Paris; but the
successful escape of some aëronauts in them was considered
encouraging enough to establish an aërial highway involving a more
wholesale manufacture of balloons than had been accomplished
before. The disused railway stations were converted into balloon
factories and training schools for aëronauts. In four months sixty-six
balloons left Paris, fifty-four being adapted to the administration of
post and telegraph; 160 persons were carried over the Prussian
lines; three million letters reached their destination; 360 pigeons
were taken up, of which only fifty-seven came back, but these
brought 100,000 messages, by means of microphotographical
despatches. In these a film 38 by 50 mm. contained 2,500
messages. The pigeons usually carried eighteen films, with 40,000
messages.
At this time the French Government attempted to produce a
navigable balloon, and employed Dupuy de Lôme on the task of
designing and building it. This was to be driven by hand power, the
screw being driven by eight labourers. The balloon was actually
made and tested. Considering the h.p. was 0.8, it is needless to say
it was not successful.
It was during the siege of Paris that Krupp constructed the first
special gun for attacking balloons, a relict which has been preserved
at Berlin.
 If such was the utility of balloons that merely drifted at the mercy
of the aërial currents they encountered, it was not to be wondered at
that, soon after the Franco-Prussian War, new attempts were made
to make them navigable. Though the term airship might reasonably
be applied to all the forms of navigable aircraft still in this country, it
has been applied in a less wide sense to those machines that are
lighter than air. In these pages the term will be used in this
connection.
The effort to navigate balloons almost dates back to the
invention of the balloon itself. It was, indeed, early realised that the
spherical shape of the ordinary balloons that drift with the winds
would be unsuitable for a craft that would have to travel against the
wind. In 1784 Meusnier designed an elongated airship, in which the
brothers Robert actually ascended. It is noticeable that in this early
design of Meusnier was the now well-known ballonet, or inner
balloon, which forms an essential feature of modern non-rigid and
semi-rigid airships for preserving the rigidity of the outer envelope
and facilitating ascent or descent.
If we except the effort of Dupuy de Lôme, the next remarkable
attempt at airship construction was in 1852, when the Parisian
Giffard made his steam-driven elongated balloon, with which he
made two experiments. These merely proved that successful
navigation against a wind would require much larger motive power
than his Lilliputian steam-engine of 3 h.p. Giffard, however, was the
pioneer of the airship driven by other than hand power. The following
are the dimensions, etc., of what will ever be an historic balloon:—

Length 44 metres
Diameter 12.00 metres
Cubic capacity 2,500 cubic metres
Horse power 3.0
Estimated speed per hour 6.71 miles

The experiments of Krebs and Renard in 1885 were noteworthy.

They were the first in which direct return journeys were made to the
place whence the balloon started.
 These experiments showed the importance of the military factor
in the development of aërial navigation. Krebs and Renard were the
officers in charge of the French Military Aëronautical Department at
Meudon, and they applied national funds to the construction of an
airship. It was the development of the electrical industry and the
production of electric motors at that time which stimulated the
experiments. The brothers Tissandier had, in 1883, propelled an
elongated balloon against a wind of some three metres a second by
means of an electric bichromate battery which supplied the power to
an electric motor. It was thought that those experiments had been
sufficiently successful for further trial of the powers of electricity.
Renard made profound and exhaustive researches into the
science of the navigable balloon. To him we are, indeed, indebted for
the elucidation of the underlying principles that have made military
airships possible.
The navigable balloon “La France” was dissymmetrical, being
made very much in the shape of a fish or bird. Its master diameter
was near the front, and the diameters diminished gradually to a point
at the back.
The following were the dimensions of the envelope:—

Length 50.40 metres

Diameter 8.40 metres
Length in diameters 6.00 metres

The airship was remarkably steady on account of the minute

precautions taken to counteract the instability produced by a
somewhat excessive length. Any device which modifies pitching at
the same time lessens the loss of speed resulting from the
resistance of the air when the ship is moving at an angle. A direct
means of reducing pitching is the dissymmetrical form given to the
envelope by placing the master diameter near the front. The
resistance of the air falls on the front surface, which in this
dissymmetric form of envelope is much shortened, while the
compensating surface at the back is augmented. Many experts are
of opinion that in this form of envelope Krebs and Renard came
nearer perfection than any other navigable balloon constructor.
Like the brothers Tissandier, they used an electric battery and
motor to drive their screw, their motive power being 9 h.p.
It was claimed that out of seven journeys, the airship returned
five times to the place whence it started. As an example of these
journeys, on September 22nd, 1885, a journey was made from
Meudon to Paris and back again. On this day the wind was blowing
at a velocity of about 3.50 metres a second—what we should call a
calm. Few, perhaps, who saw the small naval airship, the “Beta,”
manœuvring over London this autumn realised that a navigable
balloon, not so very much unlike it in form, was speeding its way
over Paris as long ago as 1885. The advent of the first at all practical
military airship was forgotten because the experiments,
comparatively successful as they were, suddenly ceased. They
came to an end because it was found that though electricity as a
motive power could afford an airship demonstration, it was unfitted
for serious and prolonged use.
One industry has often to wait for another—the world had to wait
for the missing link in aërial navigation. That was the light petroleum
motor. With its coming came the era of airships and aëroplanes.
 CHAPTER III
TYPES OF MODERN AIRSHIPS

With the new century came the modern military airship—to stay, at
any rate, until the heavier-than-air principle of aërial navigation has
so developed as to absorb those features of utility the airship has
and the aëroplane has not.
During the fourteen years which have seen the construction of
practical airships, three distinct types have been evolved—(i.) rigid,
(ii.) non-rigid, (iii.) semi-rigid. In considering the airships of Great
Britain, France, and Germany, I propose to class them together as to
types rather than under nationalities.
Each type has its own peculiar advantages. The choice of type
must depend upon the circumstances under which it is proposed to
be employed.
 Top: SNAPSHOT OF ZEPPELIN IN MID-AIR.
Centre: MILITARY LEBAUDY AIRSHIP, showing fixed
vertical and horizontal fins at the rear of gas-bag,
vertical rudder, and car suspended from rigid steel
floor underneath gas-bag.
 Bottom: CAR OF A LEBAUDY AIRSHIP, showing one
of the propellers.

I. Rigid Type.
(i.) Zeppelin (German).—There are not many examples of the
rigid type. The most important is undoubtedly the Zeppelin. This form
of airship before the present war had elicited the interest of the
aëronautical world for the long-distance records it had established.
Indeed, no little sympathy had been extended to Count Zeppelin for
his perseverance in the face of the gravest difficulties. Now the
Zeppelin has accumulated notoriety instead of fame as having been
the means of carrying on a form of warfare repugnant to the British
nation, and condemned by the Hague Convention. Imagine some
seventeen huge bicycle wheels made of aluminium, with their
aluminium spokes complete, and these gigantic wheels to be united
by longitudinal pieces of aluminium, and in this way seventeen
sections to be formed, each of which contains a separate balloon,
and it is easy to grasp the construction of the Zeppelin airship. It
consists of a number of drum-shaped gas-bags, all in a row, held
together by a framework of aluminium. They form a number of safety
compartments. The bursting of one does not materially matter—the
great airship should still remain in the air. The dimensions of
individual Zeppelins have varied to some extent. The largest that has
been built (“Sachsen,” 1913) had a cubic capacity of 21,000 cubic
metres (742,000 cubic feet), and a length of 150 metres (492 feet).
The aluminium framework containing the balloons has an outer
covering of cloth. On each side of the frame of the airship are placed
two pairs of propellers. In the original airship of 1900 these were
four-bladed, and made of aluminium. They were small, being only 44
inches in diameter, but they revolved at a very high speed. In the
later airships the screws have been considerably modified in detail,
size, and shape. For instance, in the Zeppelin which descended
accidentally at Lunéville, in France, it was found that the back pair of
the propellers on each side were four-bladed, the front pair two-
bladed. The screws are driven by motors placed in the two
aluminium cars beneath the airship. These cars are connected by a
covered gangway, which also serves as a track for a movable
balance weight, by means of which a considerable change of
balance can be effected. The motive power in the first Zeppelin was
only two Daimler motors of 16 horse power each. With this low
power little success was attained, but gradually the motive power
has been increased. We find that in the naval Zeppelin, L 3, 1914.
The motive power is three Maybach motors, giving total h.p. 650,
whereas in the types building the total h.p. is 800.
The stability of these aërial monsters is attained by the use of
large projecting fins. Horizontal steering is effected by a large central
rudder and pairs of double vertical planes riveted between the fixed
horizontal stability planes. For vertical steering there are sixteen
planes provided in sets of four on each side of the front and rear
ends of the balloons. These can be independently inclined upwards
or downwards. When the forward ones are inclined upwards and the
after planes downwards, the reaction of the air on the planes as the
airship is driven forwards causes the front part to rise and the rear
part to sink, and the airship is propelled in an inclined direction to a
higher level. The favourite housing place for the Zeppelin airships
has in the past been on Lake Constance, near Friedrichshafen, so
that they could be taken out under protection from the direction of
the wind. It is also much safer for large airships to make their
descent over the surface of water. It has been estimated that the
most powerful Zeppelins have a speed of some fifty miles an hour.
When on April 3rd, 1913, Z 16, in the course of a journey from
Friedrichshafen, was forced to descend on French soil at Lunéville,
excellent opportunity was afforded the French of a close inspection
of its details.
The following were the exact dimensions, etc.:—
 Length 140 metres
Diameter 15 metres
Cubic capacity 20,000 metres
Motive power three Maybach 510 h.p.
motors, 170 h.p. each
Speed 22 metres per sec.
Height attainable 2,200 metres
Useful carrying power 7,000 kilos.

On the top of the ship was a platform, on which a mitrailleuse

could be mounted.
It was only a few weeks before the present war that the new
Zeppelin, L Z 24, attained a new world’s record of altitude and
duration of flight. The height attained was 3,125 metres. The voyage
without a break lasted thirty-four hours fifty-nine minutes. On May
22nd, 1914, it left Friedrichshafen at 7.16 a.m. Bâle was reached at
10 a.m. At 6 p.m. it passed Frankfort, at 9 Metz, at 10.30 Bingen, at
2 a.m. Brême. At 4 a.m. it arrived above Heligoland, from whence it
made for Potsdam, where it was hailed 9.20 a.m. At 5.15 p.m. it
landed at Johannisthal.
That journey certainly showed the long-range powers of the
latest Zeppelins. If, as will be seen, it is comparatively easy for a few
well-directed aëroplanes to wreck them in mid-air, still they have
ceased to be military or naval playthings.
(ii.) Schutte-Lanz (German).—The Schutte-Lanz rigid airship is
an attempt to secure the advantages of the rigid type without the
fragilities of the Zeppelin. The framework, which contains the
separate gas compartments, is made of fir wood. The gas-bags are
claimed to be very strong. These are filled, excepting two, which
remain empty when there is only sea-level pressure; when, however,
the gas expands, it flows into the latter. These become full when an
altitude of some 2,000 metres is reached. A centrifugal pump is
employed for distributing the gas.
The volume of this airship is 26,000 cubic metres (918,000 cubic
feet). It will be seen, therefore, that this mammoth airship in size
surpasses even the largest Zeppelins.

II. Semi-rigid.
(i.) Lebaudy (French).—This airship is a crossbreed between the
rigid and non-rigid systems. By this method of construction a
considerable amount of support can be imparted to the gas-bag,
though it does not dispense with the services of the ballonet, as does
the entirely rigid type. To the genius of M. Julliot, Messrs. Lebaudy
Brothers’ engineer, we are indebted for the introduction of this
excellent type. It no doubt forms an exceedingly serviceable military
airship. In the Lebaudy original airship the underside of the balloon
consisted of a flat, rigid, oval floor made of steel tubes; to these the
stability planes were attached, and the car with its engine and
propellers was suspended. This secured a more even distribution of
weight over the balloon. The gas-bag was dissymmetrical in form.
Though not exactly resembling that excellent pattern, “La France,” it
partook of the important quality of having the master diameter near
the front. The car was a steel frame, covered with canvas, and in the
form of a boat. The screw propellers were placed on either side of
the car.
In 1909, as the British Government at that time possessed only
very small airships, the nation raised a sum of money by subscription
to present the Government with one of efficient size. The military
authorities compiled a list of somewhat severe tests which, in their
opinion, they thought an airship should be able to perform before
acceptance. At the request of the Advisory Committee, of which Lord
Roberts was chairman, the writer went to France in an honorary
capacity to select the type of airship to be adopted. There was at that
time only one firm of airship makers in France who were willing to
undertake the formidable task of making an airship that would come
up to the requirements of the British Government—the brothers
Lebaudy, whose engineer and airship designer was M. Julliot.
 The semi-rigid airship which M. Julliot designed and executed
was without doubt a chef d’œuvre of its kind. The rigid tests it had to
undergo necessitated a modification of some of the details that were
conspicuous in the airships the constructor had previously built.
In this airship the girder-built underframe was not directly
attached to the balloon, but suspended a little way beneath it.
The gas envelope had a cubic capacity of 353,165.8 cubic feet;
the length was 337¾ feet. There were two Panhard-Levasseur
motors of 135 h.p. each.
On October 26th, 1910, this airship made an historic and record
flight over the Channel from Moisson to Aldershot in five hours
twenty-eight minutes, at a speed of some thirty-eight miles an hour,
sometimes against a wind of twenty-five miles an hour.
Unfortunately, owing to a miscalculation by those responsible, the
shed which had to receive the new airship on its arrival was made
too small to house it safely. While the airship was being brought into
the shed its envelope was torn and placed hors de combat.
Since this airship was made the Lebaudy brothers have ventured
to still further increase the size of their semi-rigid airships.
(ii.) Gross (German).—This airship may be described as being
more or less a German reproduction of the Lebaudy type. It forms
part of the German airfleet. A considerable number have been made
of various sizes (for dimensions, etc., see table, German Airships,
Chapter IV., page 38).

III. Non-rigid.
This type is dependent for its maintenance of form on the
pressure of the gas inside the envelope. It is all-important that the
envelope of a navigable balloon should not lose its shape—that it
should be kept distended with sufficient tautness, so that it may be
driven through the air with considerable velocity. On this account the
non-rigid type depends entirely on the ballonet system, which
consists of having one or more small balloons inside the outer
envelope, into which air can be pumped by means of a mechanically
driven fan or ventilator to compensate for the loss of gas from any
cause. The ballonets occupy about a quarter of the whole volume of
the envelope. Such a type is exceedingly well suited for the smaller-
sized airships, destined rather for field use than long-range offensive
service. Such airships are quickly inflated and deflated. They are
also easily transported. Even the Lebaudy or Gross semi-rigid types,
though not so clumsy or difficult of transport as the Zeppelins,
require more wagon service than the absolutely non-rigid.

PARSIFAL AIRSHIP LEAVING ITS HANGAR.

 PARSIFAL AIRSHIP,
showing one of the fixed horizontal planes, steering rudder, and car.
The British Government have evolved several non-rigid airships
of moderate dimensions which have been exceedingly useful as
ballons d’instruction. For obvious reasons it is not desirable that
particulars concerning them should be published at the present
crisis.
(i.) Parsifal (German).—Very numerous examples of non-rigid
airships could be cited, but it will suffice now to mention two, the
German Parsifal and the French Clement-Bayard. The Parsifal is the
only type that the German nation has allowed to be supplied to
foreign countries. For instance, our Navy possesses one. It has also
been supplied to Austria, Italy, Russia, and Japan. On account of its
portability it is perhaps the most generally useful type of airship that
has been designed, if we exclude long-range service. It has been
exceptionally free from accidents on account of its subtleness. The
originator of the Parsifal seems to have thoroughly grasped the
sound idea that to attain success in navigating a subtle medium like
air the machine should be correspondingly subtle—as, indeed, are
the animal exponents of flight.
In the Parsifal the exclusion of the element of rigidity has been
carefully studied. All that is rigid about it is the car and motor, and
this can be conveyed in one cart.
The size of the Parsifals has been advisedly limited. The majority
of them are not more than a third of the cubic capacity of the
Zeppelins. A distinctive feature is the distance of the car from the
gas-bag. This in the first types constructed was nine metres, though
in more modern forms the figure is less. Owing to the distance of the
car from the main body the attaching cords are distributed with equal
tension over the whole length of the envelope. In the Parsifal airships
there are two ballonets, one at the front and one at the back of the
gas-bag. They are not only used for keeping the envelope rigidly
expanded, but also to facilitate rising and falling, air being admitted
into the one and expelled from the other, as the case may be.
Another distinctive feature is the four-bladed propellers. These have
fabric surfaces, and are weighted with lead. When at rest the blades
are limp, but in revolving, owing to centrifugal force, they become
endowed with the necessary rigidity. The dimensions of the Parsifals
vary considerably, the smallest made had a capacity of 3,200 cubic
metres (1908), the largest more recent ones have a capacity of
11,000 cubic metres. A very useful size is the P L 8 (1913), station
Cologne, of which the dimensions are:—

Length 77 metres
Diameter 15.50 metres
Volume 8,250 cubic metres
Total lift 5½ tons
Motors 300 h.p. (Daimler 150 h.p. each)
Speed 41 miles per hour

(ii.) Clement-Bayard.—It is a question whether it is advisable to

extend the non-rigid system to the amount that has been latterly
done in the case of such a construction as the Clement-Bayard. This
type of French airship is familiar to many in this country, as it was the
first airship to cross the Channel from France to England.
The cubic capacity of this airship was 6,300 cubic metres. A
feature was the comparatively large size of the ballonet used. To
realise how the Clement-Bayards have grown since this type of
airship came to this country, see table, French Military Airships, page
34.
Astra-Torres Type.—The Astra-Torres airships may be said to
form a rather special subdivision of the non-rigid class, for, though
there is no rigid metal in its construction, an unbendableness of keel
is assured by panels of cloth so placed horizontally as to be kept
rigid by the pressure of the air in a ballonet. Thus the virtue of rigidity
is attained without the extra weight generally appertaining thereto,
and a greater speed with economy of weight and size. The British
naval authorities possess one of these airships. For dimensions,
etc., of the latest Astra-Torres airships, see table, French Military
Airships, page 34.
It will have been seen from the above short descriptions of
distinctive types of airships Germany is the only nation which makes
a very marked feature of retaining the rigid form. It is true France has
evolved one form of rigid, the Spiess, in which the framework is
made of wood, but she undoubtedly has a preference for the semi-
rigid and non-rigid types. The rigid type has not found much favour in
Great Britain.
Reckoning from the year 1911, France appears to have nineteen
military dirigibles, and she may have one or two older ones in repair.
Some of these are building; and as in France there are many
eminent aëronautical factories, there are always also a number of
private airships built, or in building, of various sizes and various
types. These firms have enormous private airship hangars, and
every convenience for making, filling, and storing. The number of
military hangars in France is seven, at the following towns: Epinal,
Maubeuge, Belfort, Rheims, Toul, and Verdun, where there are two.
In the spring of 1913 the Italian military dirigible fleet consisted of
two units of Series M—M1 and M2—dirigibles of 12,000 cubic
metres, and three units building of Series M—M3, M4, and M5.
These dirigibles of the M series were found in practice to be the
most successful; they attained a speed of 70 kilometres per hour,
and a height of 2,000 metres; they are all semi-rigid. The Italian
Government is ambitious of rivalling in its aëronautical fleet that of
Germany, and decided in that year, 1913, on a new series—Series
G. These were to be of 24,000 cubic metres, and to travel at a speed
of 100 kilometres the hour.

Airships.
 Capacity Cub. Speed
Name. Maker. Type. H.P.
Metres. m.p.h.
1911 Adjutant Reau Astra Non- 8,950 220 32
rigid
Lieut. Chaure Astra Non- 8,850 220 32
rigid
Le Temps Zodiac 9 Non- 2,300 50 29
rigid
Capt. Ferber Zodiac 10 Non- 6,000 180 33
rigid
Capt. Lebaudy Semi- 7,500 160 28
Marécahl rigid
1912 Adjutant C. Bayard Non- — — —
Vincennot rigid
Dupuy de C. Bayard Non- — — —
Lôme rigid
Selle de Lebaudy Semi- 8,000 160 28
Beauchamp rigid
Éclaireur Astra Non- 9,100 — 28
Conté rigid
1913 E. Montgolfier C. Bayard Non- 6,500 150 36
rigid
Comot Zodiac Non- 9,500 360 37
Coutelle rigid
Fleurus Military Non- 6,500 160 40
Factory rigid
Spies Zodiac Rigid 16,400 400 43½
1914 [A]Clement- C. Bayard Non- 23,000 1,000 47
Bayard VIII. rigid
[A]
Clement- C. Bayard Non- 23,000 1,000 47
Bayard IX. rigid
 Astra-Torres Astra Non- 23,000 800 43
XV. rigid
Astra-Torres Astra Non- 23,000 800 43
XVI. rigid
Zodiac XII. Zodiac — 23,000 1,000 50
Zodiac XIII. Zodiac — 23,000 1,000 50

[A]
These two carry each one gun.

At the present moment Italy is building some very large airships,

some even bigger than the Zeppelin, and she practises ascents
diligently with those she has. One of the new airships building for the
Italian navy is a Parsifal of 18,000 cubic metres.
Great attention is paid in Russia to aëronautics. The Russians
have no national types of dirigibles or aëroplanes yet developed; but
they manufacture in their own country.
They have thirteen dirigibles (one is rumoured to be destroyed),
semi-rigid and non-rigid, amongst them a Lebaudy made in 1910,
Parsifals of 1911 and 1913, an Astra of 1913. The Parsifal of 1913
has a speed of 43–68 m.p.h. (km.).
Formerly Austria-Hungary led the way in aëronautics amongst
the nations of the Triple Alliance. Germany particularly looked to her
for flying machines, and the first Etrichs were hers; but military
aëronautics in Austria-Hungary are now at a low ebb.
The decline is ascribed to monopoly and centralisation. At the
present moment Austria has one dirigible, in a feeble condition, and
about ten aëroplanes of foreign make. Two German houses, the
Albatross and D.F.W., have quite lately opened branches in Austria.
The dual monarchy began well; in 1909 she had a small Parsifal,
in 1910 a Lebaudy, in 1911 the Körting. These three perished in
accidents. Her own system, the Boemches, presented to her by a
national subscription, failed in speed; but though she has no
dirigibles to inhabit them she has three good hangars!
Belgium has three airships, all non-rigid—two Godards and one
Astra. Although not of very late construction, all three have
innovations and interesting features. The Astra is private property.

[Topical Press.
ZEPPELIN AIRSHIP AT COLOGNE,
showing at the rear large vertical rudder, and two pairs of vertical rudders for
horizontal steering, the horizontal planes at the sides for vertical steering, two of
the four propellers at side of airship, car beneath airship.
 CHAPTER IV
THE GERMAN AIRSHIP FLEET

Many reports have been current concerning the exact dimensions of

the airship fleet that Germany can put into action. It has been said that
she has been extremely active since the beginning of the present war
in adding fresh units to the forces she had available when the war
broke out. It has also been rumoured that she is making a new type of
Zeppelin—one much smaller, and which will have greater speed than
the larger type.

German Airships in the Spring of 1913.