Prepare for the Unexpected - Cognity Daily Risk Statistics

Posted by Erika Alter, Global Head of Commercial Strategy, BISAM on Nov 2, 2016 8:00:00 AM
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You may have noticed a new addition to the bisam.com website: The Cognity Daily Risk Statistics, which visualize daily estimates of fat-tailed VaR and ETL (Expected Tail Loss), along with the widely used "normal" VaR for major global indices. And if you take a look at the Normal vs. Fat-Tail VaR spreads over the last week, you'll see that "the most interesting thing right now," as my colleague Bono Nonchev observed, "is how uninteresting the markets are at the moment."

But look more closely at the U.S. markets, and you'll see a slight widening of the Normal vs. Fat-Tailed spread, indicating potential signs of risk...perhaps attributed to the upcoming U.S. Presidential election and related unknowns?

The concept of measuring market turbulence as an additional risk indicator should be quite familiar to our readers by now. One approach we've previously discussed for assessing the level of turbulence is to look at the difference in the tail (possibility for extreme events) as measured by the Normal VaR (or ETL) and the Cognity Fat-tailed VaR/ETL model. In the case of “normal” markets, the two approaches would coincide. Widening of that spread shows increasing market turbulence, and associated with that, increasing probability of extreme events. This concept is demonstrated by the Daily Risk Statistics.

So during this period of relatively calm markets, you'll observe on the Daily Risk Statistics page, that the Normal vs. Fat-Tail spreads are right where you would expect across the world indices (Normal VaR > FatTailed VaR > FatTailed ETL). As mentioned, however, if you take a closer look specifically at the U.S. indices, you'll see that the spread has begun to widen a bit. 

In the days leading up to and just after the U.S. election, our risk analysts will be keeping an eye on these spreads and looking for increasing (or decreasing) signs of turbulence. The Daily Risk Statistics are available and updated daily at https://www.bisam.com/daily-risk-stats.


Cognity.pngGet a clear view of your portfolios and the market dynamics driving the behavior of your investments. Visit www.bisam.com/cognity to learn more about our Real World Risk Modeling capabilities and request a Cognity demo today.

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Topics: Risk Management

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