As we've previously shown, one approach for assessing levels of market turbulence is to look at the difference in the tail (possibility for extreme events) as measured by the Normal VaR (or ETL) vs. the Cognity Fat-tailed VaR (or ETL). In the case of “normal” markets (i.e. no excess probability of extreme events), the two approaches would coincide. Widening of that spread, however, indicates increasing market turbulence, and associated with that, increasing probability of extreme events.
As you’ll see from our below observations of the Normal vs. Fat-tailed VaR spreads across the MSCI World IndexTM there were no surprises as to which markets saw the most turbulence in the weeks just before and after the EU referendum vote. However, it is clear from observing the Fat-Tail vs. Normal VaR spreads, that the Fat-Tail VaR indicated a more accurate measure of risk in those markets than what the Normal VaR was indicating. So risk managers who continue to observe the spread (vs. looking only at normal VaR) can stay on top of future signs of turbulence as the Brexit “unknowns” continue to unfold.
Section 1: Europe
MSCI United Kingdom GBP
As expected the turbulence of the MSCI UK index sharply increased during the weeks leading up to the Brexit referendum, and continued to rise a week after that. The turbulence levels were at their highest since since 2009.
MSCI Spain EUR
Figure 2: MSCI Spain – The Spain stocks also show a very high increase in the turbulence indicator during the pre- and post- Brexit weeks. The turbulence levels were evenhigher than those observed during the Greek debt crisis in mid 2010.
MSCI Italy EUR
Figure 3: MSCI Italy – Similar to Spain, the Italian stock market turbulence also increased sharply during the period of June 20th – July 1st, 2016.
MSCI Portugal EUR
Figure 4: MSCI Portugal – Compared to Italy and Spain the Portuguese index does not indicate a high increase in turbulence.
MSCI Germany EUR
Figure 5: MSCI Germany – The same holds for the German stock market. Its turbulence indicator is relatively low and shows a decrease in turbulence since the beginning of 2016.
MSCI France EUR
Figure 6: MSCI France – Compared to Germany, the French market seemed to react more to the Brexit news, although its spread level is comparably lower compared to the beginning of 2016.
MSCI Finalnd EUR
Figure 7: MSCI Finland – A sharp increase in turbulence in the Finnish stock market was observed due to Brexit. The same could be observed for the other two Scandinavian markets below: MSCI Sweden and MSCI Norway, although not so pronounced as what we see here in Finland.
MSCI Sweden SEK
Figure 8: MSCI Sweden
MSCI Norway NOK Values
Figure 9: MSCI Norway
Section 2: North America
MSCI USA USD
Figure 10: MSCI USA – the US market shows no observable signs of Brexit-related turbulence – at least for the short term.
MSCI Canada CAD
Figure 11: MSCI Canada – The Canadian stock market also shows few signs of turbulence related to Brexit, particularly when compared to the turbulence observed during the Oil price drops in 2015 and 2016.
Section 3: Asia Pacific
Very few of the Asia Pacific markets show significant signs of Brexit impact to date. Below is just a sampling of Asia markets, including China, Japan and Korea.
MSCI China CNY
MSCI Japan JPY
MSCI Korea KRW
Properly reflecting market turbulence is essential. As indicated in the MSCI World Index snapshots above, the BISAM Cognity® real world risk methodology recognizes and adjusts to all market regimes – calm “normal” conditions, up markets, bubbles, corrections and transitions. Cognity’s adaptive modeling framework ensures reliable market-representative risk estimates, no matter the market conditions.