BISAM Insights Blog

Eurozone Macro Cap Equities – Prices and Volatilities on the eve of French Elections

Posted by Ivan Mitov, Head of Quantitative Research, BISAM on Apr 21, 2017 8:35:00 AM

The upcoming first round of the French presidential elections is on the radar of the global investment community. Although the new president of France will not be elected on the first round, its outcome seems critical for the future path of France and the EU.

A victory by far-right leader Marine Le Pen or far-left leader Jean-Luc Mélenchon is seen by many investors as potentially fatal for the Euro and even the EU itself. This is a political risk and the outcome of the election is quite difficult to predict by means of historical events or the standard tools for measuring and forecasting market risk (as mentioned in https://insight.factset.com/an-approach-to-government-policy-risk-management).

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Topics: Daily Risk Statistics, Risk Management

BISAM Daily Risk Statistics – Post Inauguration Market Observations

Posted by Erika Alter, Global Head of Commercial Strategy, BISAM on Jan 25, 2017 11:27:57 AM

In their November 2016 post-election analysis, Is the Recent Market Rally Indeed Small Caps Drivenour BISAM Quant team noted that, “despite the media expectations of a swift market crash following the U.S. presidential elections on November 8, 2016, the markets actually continued going up significantly.” Since then, our team has kept an eye on the Cognity Daily Risk Statistics, which visualize Normal vs. Fat-Tail VaR spreads.*  As of today, it would seem that the spreads have remained fairly flat across both the Russell 2000 and S&P 500 - a signal of ongoing optimism in the current market regime.  

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Topics: Daily Risk Statistics, Risk Management

Analyzing Volatility, a Cognity Case Study: Assessment of 2008 VIX Short

Posted by Erika Alter, Global Head of Commercial Strategy, BISAM on Dec 7, 2016 8:30:00 AM

Last week, in response to a recent story in the Financial Times,TM we published The VIX, Volatility and Market Risk. In that post, we outlined the BISAM Cognity approach to modeling risk, explaining that our "real world" risk models do not assume risk equals volatility, but rather that turbulence (vol of vol),  deviation from normality and "tail-fatness" are the lenses through which market risk should also be measured. 

To this point, and as a follow up to last week's post, I'm pleased to share this Cognity backtest from our archives, which looks at a set of long and short call "what if" scenarios on the VIX in September 2008.

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Topics: Daily Risk Statistics, Risk Management

Pre- and Post-Brexit Observations  of Fat-Tail vs. Normal VaR Spreads Across the MSCI World Index™

Posted by Ivan Mitov, Head of Quantitative Research, BISAM on Jul 21, 2016 2:30:00 AM

 

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.

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Topics: Daily Risk Statistics, Risk Management

BISAM Daily Risk Statistics - S&P 500: June 27 Brexit Update

Posted by Erika Alter, Global Head of Commercial Strategy, BISAM on Jun 27, 2016 12:54:51 PM

Normal vs. Fat-Tail VaR

As an industry standard, Value at Risk (VaR) measures the worst expected loss of a portfolio over a specific time interval at a given confidence level. Most commercial risk analytics solutions measure VaR based on the thin-tailed and symmetric normal, “bell-shaped” distribution curve. These normal distribution assumptions result in overly optimistic VaR estimates and inadequately account for extreme events - as demonstrated by the current “Brexit” crisis, 

Using BISAM Cognity’s Fat-Tailed VaR methodology, large differences are observed in times of crisis between the conventional normal VaR and the Fat-Tailed VaR, with the normal model failing to predict extreme events.

This is quite evident in the below comparison of Normal VaR vs. Fat-Tail VaR for the S&P 500.

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Topics: Daily Risk Statistics, Risk Management

Snapshot: Market Turbulence Across the MSCI World Index™

Posted by Dr. Boryana Racheva-Iotova, Global Head of Risk, BISAM on Mar 15, 2016 10:19:48 AM

Last week we mentioned the concept of measuring market turbulence as an additional risk indicator. One approach 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 (or ETL) model. In the case of “normal” markets (i.e. no excess probability of extreme events), the two approaches would coincide. Widening of that spread shows increasing market turbulence, and - associated with that - increasing probability of extreme events.

To analyze the current market environment, we typically look at different markets and factors comparing the current Fat-tailed versus Normal VaR spread for each one of the segments to the average values observed during various important historical periods.

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Topics: Daily Risk Statistics, Risk Management