Cash & Liquidity ManagementInvestment & FundingSurvey Sees Risk Levels Returning to Those of Pre-financial Crisis

Survey Sees Risk Levels Returning to Those of Pre-financial Crisis

With most markets posting strong gains in Q312, Axioma reports that risk forecasts generated by its risk models dropped, paralleling a decline in the VIX to its lowest level since 2007, according to the latest edition of ‘Axioma Insight: Quarterly Risk Review’, a reference on the state of investment markets for portfolio managers, risk managers and other investment professionals.

“The data suggest an eerie calm in world financial markets, despite a raft of looming concerns, including the European debt crisis, the threat of a US ‘fiscal cliff’ and the slowing of growth in China,” said Melissa Brown, senior director, applied research and co-author of the report.

According to the report findings:

  • Risk levels approached the levels observed before the financial crisis, and those that were sustained through the mid-1990s in the US as well.
  • Risk dropped substantially around the globe during Q312, and short-horizon forecasts fell more than medium-horizon forecasts, in some cases a lot more. Since short-horizon forecasts tend to lead medium-horizon, the latter are likely to drop in coming months.
  • The one major exception to this trend is China. Risk forecasts in the rest of Asia fell, but not as much as in Europe or North America. After the end of the quarter, risk continued to fall in many markets.
  • Short-horizon risk was also sharply lower than it was a year ago, whereas medium-horizon risk was somewhat higher.
  • Lower factor volatility drove the decrease in risk; decomposition of the full covariance matrix showed that lower correlations also contributed substantially. Again, China was the exception.
  • Factor performance was quite muted during Q3, with few factors’ returns falling outside of a one-standard-deviation range. Low volatility fared well in some regions, but it did not do particularly well in the global benchmark. A region-by-region would have likely been more effective for low volatility strategies.
  • Median correlations were generally lower at the end of the third quarter than at the end of the second, and well below recent peaks. Cross-sectional dispersion remained low, however, which may have impacted managers’ ability to outpace their benchmarks.
  • There were a few significant changes in factor correlations.
  • Falling risk and changing correlations may have necessitated more risk-related trading for managers to maintain expected levels of tracking error.

“The macro issues we are seeing in the headlines could already be baked into stock prices, and for that reason volatility has remained subdued,” said Brown. “Or, the extreme uncertainty in current markets may have simply paralysed investors, which would also have had a dampening effect on volatility. More ominously, this could also be the calm before the storm.”

Related Articles

Investors play down China trade war fears as domestic market soars

Investment & Funding Investors play down China trade war fears as domestic market soars

2m Simon Milne
Risky business?

Capital Markets Risky business?

2m Nina Brumma
How to trade bitcoin: an exploration of popular bitcoin exchanges

Investment & Funding How to trade bitcoin: an exploration of popular bitcoin exchanges

3m Michael McCaw
What is the function of corporate treasury?

Cash Management What is the function of corporate treasury?

3m Michael McCaw
"The architecture of financial markets has changed": Stefan Bielmeier, DZ Bank

Automation "The architecture of financial markets has changed": Stefan Bielmeier, DZ Bank

4m Victoria Beckett
China’s regulatory changes stimulate international interest

Asia Pacific China’s regulatory changes stimulate international interest

4m Michael McCaw
Why Ferguson Plc opts for floating rate debt: Bellin 1TC conference day 2

Capital Markets Why Ferguson Plc opts for floating rate debt: Bellin 1TC conference day 2

4m Victoria Beckett
Cold comfort for SMEs amidst Carillion bankruptcy

Economy Cold comfort for SMEs amidst Carillion bankruptcy

4m GTNews