Equity Risk Monitor Insights

Week of April 20

As the head of the Applied Research team, I am charged with providing insights into the current state of market risk and how it might be impacting investors’ portfolios. Once a week, we publish a summary of the highlights from the prior week, using Axioma’s risk models and analytic tools to transform data into information.

This week, our models showed that the US saw large swings in asset-to-asset correlations in April, amid the release of corporate earnings, mounting geopolitical tensions, and fluctuating oil prices. 20-day median pairwise asset correlation in the Russell 1000 rose to 0.29 at the end of March, but after reaching this six-month high, 20-day correlations oscillated widely. Over the past five business days, correlations climbed from around 0.20 to above 0.25, only to fall below 0.20 as of last Thursday. At the same time, 60-day correlations increased slightly above 0.15 during this month, but remain quite low relative to historical levels. 
We also noticed that equity risk in the UK ticked up following the British Prime Minister’s call for an early general election last week. The increase was reflected in all of Axioma’s UK risk model variants: fundamental and statistical, at both short and medium horizons. The largest five-day increase, of about 80 basis points, was recorded in the short-horizon fundamental model. The increase in stock volatility and stock correlations contributed equally to the rise in risk. At the same time, 20-day asset correlations climbed last week to levels not seen since November 2016.

Asset correlations were not the only market-related variable that started to climb in the recent weeks, as the Exchange Rate Sensitivity strongly outperformed all other UK style factors over the past six months, as the British pound strengthened. The factor recorded positive returns over the past week, month and six months, and only slightly negative returns over the past three months. Six-month cumulative returns exceeded 3% last Thursday, as the pound reached the high-end of its six-month return range against the greenback. It was the highest six-month factor return among its UK peers. That is, stocks with positive exposure to the Exchange Rate Sensitivity factor benefited during this period—generally, importers are expected to fare well as the currency appreciates.

If you’d like to get timely insights emailed directly to you, please sign up for our weekly newsletter.

Melissa R. Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.

You might also be interested in

Exposing Vulnerabilities with a Multi-Asset Class Risk System

We recently published a paper that discusses how the analysis of a global equity portfolio can be enhanced through the use of a multi-asset class risk solution.

Posted 03.21.17 Olivier d'Assier

Currency Domination: The US Election, Currency Effects, and Portfolio Risk

Both the US election and the Brexit vote surprised the markets. It resulted in significant volatility, specifically for currency exchange rates. 

Posted 01.31.17 Christoph Schon, CFA, CIPM

Why Do So Many Asset Managers Continue to Rely on Old Risk Management Systems?

Nearly a decade after the financial crisis, legacy technology slows adoption of new-generation, enterprise-wide solutions and tools.

Posted 02.24.17 Sebastian Ceria