Journal of Risk

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An enterprise perspective of performance attribution: introducing the keel model

Robert Brooks

  • Liabilities have a significant role in stochastic behavior of net worth or surplus
  • Surplus decomposition measures sensitivity to key drivers including liabilities
  • The Keel model is intuitive, extensible, and will serve as an aid to decision-makers
  • Mini cases: bank, defined benefit retirement system, and high net worth family
     

In this paper, performance attribution is extended to an enterprise level based on the keel model. The keel model introduced here is applied to the problem of attributing enterprise value changes to various risk factors. It can also be used by investment professionals for portfolio surplus management purposes. The keel model is general in form, and it is able to incorporate as many factors as the user requires. Changes in enterprise value are decomposed into four macro-components. The horizon component captures change attributable to time. The spot rate component captures movement in some reference term structure of interest rates. The spread component captures change attributable to spread movement over the spot rate curve. There is also an interaction component. The spot rate and spread components are further decomposed into components attributable to duration, convexity and cross-convexity. Each of these components is further decomposed based on level, slope and curvature. Case studies of this attribution approach are also provided.

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