Axioma Global Multi-Asset Class Risk Model Fact Sheet

AXGMM Version 2.0

May 2018

Axioma’s Global Multi-Asset Class Risk Model (Global MAC Model) is in-
tended to capture the investment risk of a multi-asset class portfolio by explaining asset
returns as a combination of exposures to risk factor returns. The model is available as
a factor covariance matrix, updated weekly, together with a matrix of asset exposures to
the factors, which can be downloaded for integration with risk reporting and attribution
systems.

1 Introduction
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• Yield curve • Currency

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Axioma’s Global MAC Model offers users • Volatility • Inflation

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an intuitive decomposition of a multi–asset class • Credit • Commodity curves

portfolio. The model is designed for a broad-
based analysis of global multi–asset class hold-
ings. As such, the resolution of the factors tar-
gets understanding sources of risk across a broad
portfolio. The model contains factors derived
from an integrated set of pricing models cali-
brated to tradeable asset prices for a wide range
of asset classes. This allows portfolio managers
to analyze the risk and performance of their port-
folios across all assets in a consistent and rigorous
manner.
The Global MAC Model combines the cover-
age of Axioma’s global equity risk model with
coverage of the fixed-income and commodities
markets. Leveraging the expertise embedded in
Axioma Robust Equity Models and an extensive
universe of fixed-income factors, the Global MAC
Model allows portfolio managers holding a wide
range of assets to use a consistent set of models
to analyze their risk and attribute performance.
Axioma’s factor models are designed to
separate and quantify systematic and id-
iosyncratic components of risk. The sys-
tematic factors captured in the model include:
• Sector • Country
• Equity Style
The Global MAC Model is produced by Ax-
ioma’s Enterprise Risk Platform Axioma Risk.
This cloud-based platform allows extensive flex-
ibility in factor definition, risk model construc-
tion, stress testing, risk analysis, and reporting.
The Global MAC Model provides for a stream-
lined portfolio risk analysis, while Axioma Risk
offers a fully customizable enterprise risk sys-
tem.
2 Top Level Structure of the
Global MAC Risk Model
The Global MAC Model is a linear, parametric
risk model composed of i) a global set of risk fac-
tors for which factor returns and an associated
covariance matrix are computed; and ii) a set of
exposures to these risk factors for each asset in
the covered universe. If there are NA assets in
the portfolio and NF risk factors, we can define

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an NA × NF exposure matrix B with the ith row factor returns are then calculated off a cross sec-
containing the exposures of asset i to all the fac- tional regression model carried out on an estima-
tors. The portfolio risk (i.e. the volatility of the tion universe.
portfolio return) is then computed as
 1/2 3.2 Global Fixed-Income Factor Model
σΠ = wT BΣF B T w
The Global Fixed-Income Factor Model de-
rives rate curves, spread curves and volatility sur-
where ΣF is the covariance matrix of the fac-
faces from market prices and estimates factors
tor returns and w is the vector of dollar posi-
that drive changes in the curves. The factors are
tion weights for each asset. Axioma provides the
designed to separate and quantify systematic and
factor return covariance matrix and the expo-
idiosyncratic components of risk. The systematic
sure matrix for a specific portfolio as the weekly
factors within a typical fixed-income portfolio in-
Global MAC Model deliverable, while the user
clude changes in:
provides the universe and position data.
• Sovereign rates
3 Risk Factors in the Global MAC
• Swap spreads
Model
• Spot FX rates
The set of risk factors for the Global MAC
Model is comprised of the Axioma Global Eq- • Corporate credit spreads by rating and rat-
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uity Fundamental Model (the World-Wide Fun- ing/GICS sector

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damental Model, version 4.0), the Axioma Global

• Break-even inflation rates
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Fixed-Income Factor Model, and a commodity

model based on constant maturity futures curves,
as well as volatility factors derived from swaption
data. Summary information for specific asset
classes are described here, detailed information
is available in the risk model handbook.
3.1 Global Equity Fundamental Factor
Model
For equities, the Global MAC Model imposes
a structure on the asset returns by identifying
common factors within the market that is, fac-
tors that drive asset returns. Returns can then
be modeled as a function of a relatively small
number of parameters, and estimating poten-
tially millions of asset covariances can thus be
simplified to calculating a much smaller set of
numbers.
The factors used in the Global Equity Funda-
mental Factor Model fall into several broad cat-
egories, namely Industry, Country, & Style fac-
tors. Calculation of the exposures to these fac-
tors is described in the Section 4. Once the ex-
posures to these factors have been determined,
• Asset-backed security spreads
• Covered bond spreads
• Other government, GRE and Supranational
spreads
• Derivatives: Swaption Volatilities, CDS
spreads
The table in Appendix A lists the number of
such curves/factors grouped by category.
3.3 Commodities
Commodity futures contracts are modeled in
Axioma Risk using Constant Maturity Futures
(CMF) curves. The model uses daily futures set-
tlement prices and maturities to construct the
CMF curves as a set of interpolated nodes at
fixed maturities. The nodes of the CMF curves
are the risk factors, and the CMF curves are con-
structed using the one day log returns of the fu-
tures prices.

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4 Exposure Calculation in the T ). When the maturity of the contract lies be-
Global MAC Model tween two nodes, the contract has exposure to
the two surrounding nodes and each exposure
Calculation of the sensitivity of an asset price is computed as the proportional linear distance
return to the various risk factors is handled dif- from the maturity to the node maturity.
ferently across the broad asset groupings: Equity,
Fixed-Income, and Commodities. Summary in- 4.4 Exposure to Volatility and Currency
formation for risk factor groups is provided in Risk Factors
this section with detailed information available
Because the volatility and currency risk fac-
in the risk model handbook.
tors are computed as log returns, the exposure is
computed as
4.1 Exposure to Equity Risk Factors X ∂PA
β= (1)
PA ∂X
Exposure to the industry and country factors
in the equity risk model are binary, either 0 or where X is either the volatility level σ or the spot
1. These are determined by the GICS industry exchange rate. For non-US dollar denominated
classification of the company and the country assets with no currency exposure other than the
of incorporation. Exposure to the style factors reporting currency exchange-rate risk, this for-
is computed based on a Z-score transformation mula corresponds to a currency risk exposure of
of a combination of financial ratios or perfor- −1.
mance measures associated with the definition
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of the style factor. The models are constructed 5 Global MAC Model Parameters
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to maximize the explanatory power of the style

The Global MAC Model includes a covariance
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factors driven by the definitions of these expo-

sures. Industry and country exposures are gener- matrix estimated from the time series of the rel-
ally static, while most style factor exposures are evant factors for a given portfolio. Details of the
updated when new financial performance data parameter choices for the covariance estimation
are released. calculation are given here.

4.2 Exposure to Fixed-Income Risk Fac- 5.1 Model History

tors Monthly covariance matrix history from Jan-
For all fixed-income rate and spread risk fac- uary 2012 onward; daily factor returns from Jan-
tors, the exposure is computed as the price re- uary 2007.
turn sensitivity to changes in the factor. Axioma
has implemented detailed pricing functions for 5.2 Reporting Currency
all fixed-income assets covered and computes ex- USD.
posures to the underlying risk factors based on
these pricing functions.
5.3 Factor Volatility / Covariance Calcu-
lation Parameters
4.3 Exposure to Commodity Risk Factors
The covariance matrix for the model is esti-
As the risk factors for commodity future con- mated based on five years of daily factor-return
tracts are log-return CMF curves, the exposure data using the following estimation procedure.
of a contract with the same maturity as a node The daily factor returns are aggregated into over-
point is exactly 1 (i.e. the volatility of the com- lapping weekly returns, thus creating a time se-
modity future contract with maturity T is the ries of approximately 1250 observations of weekly
same as the volatility of the CMF curve at point returns. Note that weekly returns are used

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to minimize the impact of asynchronous timing
of returns reporting and potentially stale fixed-
income pricing. Overlapping returns are used to
ensure that the model still responds quickly to
market shocks, as well as to increase the effective
sample size used in the covariance estimation.
An exponentially decaying weighting scheme is
used to more heavily weight the recent return be-
havior. A half-life of 250 daily observations (one
year) is used to compute both variances and cor-
relations.

5.4 Specific Risk

For assets with sufficient data and idiosyn-
cratic drivers of risk, specific risk (i.e. additional
volatility uncorrelated with the factors in the
model) is estimated and included in the model.
The methodology implemented varies by asset
class in the model:

• For equity assets, specific risk is defined as

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the volatility of the residual that is not ex-

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plained by the factors.

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• Specific risk for fixed-income corporate secu-

rities is estimated, where the data are avail-
able, from single-name issuer-curve volatili-
ties.

6 Data Deliverables
The Axioma Global Multi-Asset Class Model is
accessible through Axioma’s SFTP site.

1. Availability: The covariance and exposure

matrices are updated weekly and available
to download via SFTP.

2. Historical Coverage: A monthly history

of covariance and exposure matrices is avail-
able going back to January 2012. Daily fac-
tor returns are available going back to Jan-
uary 2007.

3. Data Format: Delimited text files (flat-

files)

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Appendices

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Appendix A Global MAC Model: Curve and Factor Structure

Reference
Curve/Factor Type Definition Count Comments
Curve
CO-Commodity Futures Constant Maturity Futures 98 N/A
Spot exchange rates for 92.
Currency Currency Risk Factors 92 N/A All exchange rates are rela-
tive to USD
Equity Country Factors from
EQ-Country AXWW21 (Global Equity) 85 N/A
Model
Equity Industry Factors from
EQ-Industry AXWW21 (Global Equity) 68 N/A
Model
Equity Local Market Resid-
EQ-Local ual Factors from AXWW21 1 N/A
(Global Equity) Model
Equity Global Market Factors
EQ-Market from AXWW21 (Global Eq- 1 N/A
uity) Model
Equity Style Factors from
EQ-Style AXWW21 (Global Equity) 9 N/A
Model
Airline, Auto, CMBS, Credit
U.S. Investment Grade Rating Swap Card, Equipment, Home Eq-
FI-U.S. IG ABS spread 8
Spread (USD) uity, Manufactured Housing,
Structured RMBS
Sovereign US Agency Issuers - FHLB,
FI-Agency Spread U.S. Agency Spread 3
(USD) FHLMC, FNMA
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Real (BEI
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Spread of Nominal over Real Spread = 17 DM Countries, 12 EM

FI-Break Even Inflation 29
for Zero Coupon Nominal - Countries
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Real)
Canadian Provinicial Spread Sovereign
FI-CA Provincial Spread 10
over CA Sovereign (CAD)
AUD, CAD, CHF, EUR,
Corporate Rating Spread over
FI-Corporate Rating Spread 35 Swap GBP, JPY, USD × 5 Rating
Swap
Categories
FI-Corporate Sector by Rating Sector Spread over Rating Rating
202
Spread Category Curve
DE, DE-Jumbo, DK, ES,
FI-Covered Bond Spread Spread over Swap 7 Swap
FR, SE-EUR, SE-SEK
15 DM Countries, EUR, 22
FI-Sovereign Zero Sovereign Zero Coupon Curve 37 N/A
EM Countries
Intra-Eurozone Sovereign Sovereign
FI-Sovereign Spread (EUR) 15 15 Eurozone Countries
Spread over EU Sovereign (EUR)
Sovereign 22 EM Countries issuing
FI-Sovereign Spread (USD) EM Spread over US Sovereign 22
(USD) USD bonds
Swap
Supranational Ratings Spread (EUR), EUR AAA, EUR IG, USD
FI-Supranational Spread 4
over Swap Swap AAA, USD IG
(USD)
15 DM Currencies, 22 EM
FI-Swap Spread Swap Zero Spread 37 Sovereign
Currencies
13 DM Currencies, 6 EM
FI-Interest Rate Volatility 2 Year × 2 Year swaption 19 N/A
Currencies
Total Curve Count 782
Total FI & Equity Factor
1170
Count

Table 1: AXGMM Factor Definitions & Coverage

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