Global Tactical Asset Allocation Assignment 1 Country Risk Indices and Portfolio Management CRIIP Ernesto Cadeiras Matias Correa Sugio Suzuki Sandeep Toshniwal

International Country Risk Guide Three different risks: financial, political and economical Based on a compilation of 24 risk factors; 5 financial, 13 political and 6 economical Issued monthly A composite risk index is also calculated as a weighted average of all the factors

Our Goal Use the ICRG Risk Ratings to: –Forecast returns on MSCI index for 18 countries using the changes ICRG ratings –Forecast the 1-year ahead volatility (variance) on the monthly returns on the MSCI index Test the performance of portfolios of countries based on the direction of the change in the composite rating

Forecasting Returns Early in our analysis we found out that: –The models had very bad performance in- sample –Specifically the economical risk rating was insignificant Based on these findings we tested 4 models to forecast returns

The Models Independent Variables: Model 1: Change in the political and financial rating Model 2: Change in all 3 ratings Model 3: Value of the 3 ratings Model 4: Value of the political and financial ratings

The Results

Forecasting Volatility We tested two models to forecast volatility –Model 1: Values of the three ratings –Model 2: Changes in the three ratings Model 1 had an impressive performance (in-sample) When we tested out-of-sample, model 2 was actually better than model 1

Portfolio Comparisons MSCI World Portfolio 0 Portfolio +1 Portfolio -1 $100 $300 $500 $700 $900 $1,100 $1, %0.20%0.25%0.30%0.35%0.40% Variance Returns (base $100 - Jan. '84)

Conclusions Our results show worse performance than the models we tested in assignment 3 Some (not few) of the coefficients were positive There seems to be some forecasting power in the changes in the ratings –Variable is too discrete

Netherlands, Model 1 Plot of YrRet predicted observed