Fundamental multifactor models are used in risk management systems because they balance forecasting accuracy, computational tractability, and intuitive interpretation. The models are implemented by identifying common systematic factors of different asset classes, estimating their joint distribution, and then translating them into risk metrics of individual securities and portfolios. For fixed-income instrument models, factors driving curve and spread dynamics are a natural choice.
Download the Daily Corporate Spread Factor Models: USD- and EUR-Denominated Emerging Market Debt white paper for an overview of the second set of FactSet daily corporate spread models to be introduced to our Monte Carlo Multi-Asset Class product. These linear cross-sectional models cover USD- and EUR-denominated bonds issued by emerging market corporates, sovereigns, and agencies. Both models assume that primary risk factors are determined by the issuer’s country of risk. The common factor returns are estimated via cross-sectional regressions using representative bond universes.