The Axioma Worldwide Equity Linked Factor Risk Model (Linked Model) combines the Axioma United States Equity Model (AXUS4) with the Axioma Developed Markets ex-US (AXDMxUS4) and the Axioma Emerging Markets (AXEM4) Models into one interconnected equity model.
The Challenge for Global Quant Funds
Traditional global equity models have to make assumptions regarding the homogeneity of factor behavior over a set of disparate local and regional markets. However, markets trading at different times during the day representing different investment opportunities sets create unique factor behaviors in each market. A generalized model of global equity may average this factor behavior which can have consequences in terms of risk forecast accuracy as well as risk-adjusted performance.
The Linked Model is an interconnected equity model with full coverage of global markets but a regional factor structure that recognizes the differences in factor phenomena from one market to another. Maintaining the integrity of the sub-model factor covariance structure as well as the locally-estimated specific risk allows finer control of factor exposure, the ability to hedge exposure in one region with another with reliable estimates of cross-market covariance and the opportunity to take advantage of cross-market diversification to enhance risk-adjusted return.
The Covariance Structure of the Linked Model
Linked Models maintain the integrity of sub-model factor structures.