Checking Your Financial Model's Health: A Post-Event Checkup

Financial experts rely on factor models to grasp how different assets behave together and manage risks. But after major events like the COVID-19 pandemic, these models might need a reality check. That's where the mosaic permutation test comes in. It's a clever way to ensure your models are still doing their job without making any assumptions. This test uses cutting-edge machine learning to spot any issues quickly and accurately. Let's take BlackRock's BFRE model as an example. It's usually great at explaining asset movements. However, we found some odd behaviors with certain real estate stocks. Adding new factors helped resolve these issues. The methods used in this test are available in the python package called mosaicperm. This test can save a lot of time and reduce risks by not overhauling models that are already working well. It's a smart tool for financial experts to have in their toolkit, especially after significant events.