In PaulineNimo/mscidata: MSCI USA and Min Vol Data Analysis

Introduction {#intro}

I would like to start by introducing the main index this thesis will be focusing on, USMV. The MSCI Minimum Volatility Index (USMV) is intended to have a lower beta, lower volatility, lower cap bias, and contain more stocks with less risk than its parent index. It is rebalanced twice a year, on the last trading days of May and November. The index typically has around 180 constituents, with an average of 20 new additions and 14 deletions every 6 months when rebalancing occurs. Over the last five, years, the number of additions has ranged from 12 to 25, while the deletions have been between 10 and 19. Changes to the index are usually announced nine trading days before they are set to take place.

Using the Barra Open Optimizer, USMV creates a minimum variance portfolio of low risk stocks, as a subset from its parent index, EUSA. Using this estimated security covariance matrix, the MSCI Minimum Volatility Index is the product of the lowest absolute volatility, considering the constraints. Moreover, these additions are simply a relabeling of existing stocks in the parent index, and do not include new additions to the parent index. The low-risk stocks chosen to be in USMV are determined by a set of constraints, like maintaining a certain sector or country weight relative to the parent index.

There are many specific constraints to this index. The first is that an individual stock cannot exceed 1.5% or 20 times the weight of the stock in the parent index. The minimum weight of a security in the index is also capped at 0.05%. USMV also aims to keep the weight of specific countries within a 5% range of the weight in the parent index, or 3 times the weight of the country in the parent index. Sector weights of USMV also cannot deviate more than 5% from the sector weights in the parent index. One way turnover of the index is also maxed at 10%. Thus, taking into account these constraints, the Barra Open Optimizer creates the lowest absolute volatility portfolio possible.

PaulineNimo/mscidata documentation built on May 8, 2019, 1:27 a.m.