Investment Risk and Uncertainty: Advanced Risk Awareness Techniques for the Intelligent Investor

CHAPTER 15

The SunGard APT Risk Management System

Laurence Wormald, PhD

Go to www.wiley.com/go/greiner to see video titled “Laurence Wormald.”

Risk is the energy that drives markets. A robust model of market risk must take account of the comovement of asset returns both in normal times and when markets are stressed. SunGard APT provides a risk management solution based on the concept of “three pillars of risk management”: risk measurement, risk attribution, and scenario analysis. Flexibility in both attribution and scenario analysis is the key to effective risk management. To achieve that flexibility, APT constructs statistical factor models of risky asset markets and then allows users to select the explanatory factors that match their own investment process when carrying out attribution and scenario analysis; this approach based on explanatory factors is called RiskScan. However, for robust risk measurement, APT has always relied on statistical factor modeling methodologies.

INTRODUCTION TO STATISTICAL FACTOR MODELS

Statistical factor models are economically motivated and consistent with asset pricing theory and the observed effects of arbitrage across markets. Theoretical work on arbitrage pricing theory was pioneered by Ross1 and Roll and Ross,2 and extended by Connor and Korajczyk;3 early applications to risk management for investment were documented by Blin, Bender, and Guerard.4 Recent evidence for the robustness of the approach for optimized strategies is provided by ...