There is quite a bit of art in constructing an equity risk model. This paper summarizes some of the key decisions: choice of factors, horizon matching, cross-sectional vs. time-series method, and regression procedure to name a few.

The risk vendors make available their methodologies to their customers (and in more recent years also patent protect their method).

I'd like to compile links to the whitepapers to the current equity risk models of the majors: Axioma, BARRA, Capital IQ, Northfield, and FinAnalytica so I can make a more informed decision on the strength/weaknesses of each approach.

By methodology, I mean the construction of the factor model and any related adjustments to the covariance matrix. For example, BARRA's most current model is the USE4 Eigenfactor Methodology. Here's a link to Axioma's Alpha Alignment Factor patent (although it does not go into construction of factor model).


2 Answers 2


Also, RiskMetrics' 'granular approach' may be of interest (I have no affiliation):


I. Developing an Equity Factor Model for Risk

II. The RiskMetrics 2006 Methodology, RM2006


See this long document describing the methodology of the most comprehensive Northfield model



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