Wednesday’s Sell-Off Leads to Big Changes in Benchmark Risk

Wednesday’s sell-off in global markets clearly had an impact on risk, as factor volatility soared (most notably that of the market factor) and individual stock volatility and asset correlations also climbed substantially. Interestingly, a decrease in factor correlations offset the sharp increase in factor volatility in multi-country benchmarks such as FTSE Developed and FTSE Emerging, most likely the result of lower currency and country correlations. See our daily risk monitors for more details.

Figure 1 shows fundamental short-horizon risk forecasts for some major benchmarks on five dates – the end of last year, the end of the first quarter (after the last big market rout), the end of September (the date of our most recent Insight report update), and then October 9 and October 10. Risk shot up yesterday in most benchmarks (FTSE Japan was the major exception), but in most cases ended yesterday lower than it was at the end of March. FTSE Emerging, where risk has been increasing most of this year, was an exception. We also saw an increase in medium-horizon risk after yesterday’s move, and expect to see further increases unless markets settle down quickly.

Figure 2 shows the percent change in risk from those dates to yesterday, and highlights that the Russell 1000 saw the biggest change yesterday, but risk for FTSE Developed is up the most in percentage (not percentage point) terms year to date. Japan’s risk has been relatively flat recently.

We will undoubtedly report updates to these figures and dig down into the underlying components of changes in risk in the days ahead, but we knew our readers would want to see the impact of the market’s big move as soon as possible.  Check our blog posts and Weekly Highlights for those updates.  You can register to get the highlights emailed to you once a week here, and get notification about new blog posts here.

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.