Factor risk model based system, method, and computer program product for generating risk forecasts

A system, comprising:

• determining means for determining risk factor return for each risk factor in a set of selected risk factors;
• first estimating means for estimating a risk factor covariance matrix of the selected risk factors;
• second estimating means for estimating an idiosyncratic variance matrix corresponding to a set of selected securities;
• third estimating means for estimating, for each risk factor in the set of selected risk factors, a risk factor loading coefficient for each security in a set of selected securities;
• first projecting means for projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the first projecting means utilizes information in implied volatility in projecting the risk factor covariance matrix into a future forecast;
• and
• second projecting means for projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein
• the estimated risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities.

A computer program product including a machine readable medium having stored therein instructions, the instructions comprising:

• instructions for determining a risk factor's return, wherein the risk factor is from a set of two or more selected risk factors;
• instruction for constructing a risk factor covariance matrix corresponding to the selected risk factors;
• instruction for constructing an idiosyncratic variance matrix corresponding to securities in a selected set of securities;
• instructions for determining, for each risk factor in the set of risk factors, a risk factor loading coefficient for each security in the set of securities;
• instructions for projecting the risk factor covariance matrix into a future forecast, thereby producing a future forecast of the risk factor covariance matrix, wherein the instructions for projecting the risk factor covariance matrix into a future forecast comprise instructions for utilizing information in implied volatility in projecting the risk factor covariance matrix into a future forecast;
• and
• instructions for projecting the idiosyncratic variance matrix into a future forecast, thereby producing a future forecast of the idiosyncratic variance matrix, wherein
• the determined risk factor loading coefficients, the future forecast of the risk factor covariance matrix, and the future forecast of the idiosyncratic variance matrix can be used together to determine a forecast of the variance-covariance matrix for all securities in the selected set of securities.