SANTA MONICA, Calif., Feb. 3, 2009 (GLOBE NEWSWIRE) -- Reinforcing the conclusions of a white paper sent to clients in November, Wilshire Analytics' global equity risk model, the Wilshire GR6 Equity Risk Model(sm), shows the year-end spreads between the model's long-term and short-term valuations of risk are at record highs:
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November December Previous Record
2008 2007 Spread (July 2002)
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Global average of equity
risk spreads between
equally-weighted and
exponentially-weighted
risk estimates 10.54% 1.28% 2.57%
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The paper, "Wilshire Equity Analytics: A Comparative Study of the Wilshire GR6 Covariance Matrices," by Edward Rackham, PhD, vice president, Wilshire Associates, shows the impact on portfolio risk of five different risk estimation schemes.
"Dr. Rackham's research shows that in order to be useful within the investment process, a selected risk model needs to reflect the volatility of the expected trading horizon," commented David L. Hall, senior managing director, Wilshire Associates and head of Wilshire Equity Analytics, a division of Wilshire Analytics. "A manager using a model with a time horizon inconsistent with the investment horizon means that the manager may be managing to the wrong estimates of portfolio total risk and tracking error."
Dr. Rackham, who oversees the development of new risk, performance and other analytics functionality in the Wilshire Atlas(sm), the premier solution offered by Wilshire Equity Analytics, commented that the methodology used to estimate covariance can lead to significantly different estimations of portfolio risk.
"The paper also discusses how the Wilshire Equity GR6 Risk Model's 2005 implementation of Wilshire's proprietary Structured Hadamard Product Target Shrinkage Estimator (SHaPTSE) improves the performance of the model's short term risk estimates through 'shrinkage' of any spurious 'off-diagonal elements' found in the model's daily covariance matrices," Dr. Rackham said. "As I noted in the paper, ' . . . in comparison to longer-term risk estimates, it seems reasonable to conclude that the best one-month forward-looking predictions of risk . . . are yielded by the Daily Exponential . . . matrices.'"
Dr. Rackham cautioned that this does not mean that long term risk practitioners should stop using monthly models as they may prefer more stable risk numbers rather than concern themselves with sensitivity to daily fluctuations. "Users of risk analytics need to be aware that in times of extreme market volatility differences between the risk estimates of different models tend to be exaggerated," he explained.
Please go to www.wilshire.com for more information on the paper.
About Wilshire Associates
Wilshire Associates is a leading global investment technology, investment consulting and investment management firm with four business units: Wilshire Analytics, Wilshire Funds Management, Wilshire Consulting, and Wilshire Private Markets. The firm was founded in 1972, revolutionizing the industry by pioneering the application of investment analytics and research to investment management for the institutional marketplace.
Wilshire also is credited with helping to develop the field of quantitative investment analysis that uses mathematical tools to analyze market risks. All other business units evolved from Wilshire's strong analytics foundation.
Wilshire developed the index now known as the Dow Jones Wilshire 5000 Composite Index(sm), the first asset/liability models for pension funds, the first U.S. equity style metrics work and many other "firsts" as the firm grew to approximately 350 employees serving the investment needs of institutional and high net worth clients around the world.
Based in Santa Monica, California, Wilshire provides services to clients in more than 20 countries representing approximately 600 organizations with assets totaling approximately $12.5 trillion as of December 31, 2007. Wilshire(r), Wilshire Atlas(sm) and Wilshire GR6 Equity Risk Model(sm) are service marks of Wilshire Associates Incorporated.