Time to Manage Your Risk

19 September 2011

European Equity Index Volatility

With the EU debt crisis occupying front page headlines since early August, all eyes have been on the major European stock indexes. Markets have been attempting to come to terms with lackluster EU-zone growth projections, undercapitalized banks, and (worst of all) structural contagion due to the spectre of sovereign default.

Here are the current major Equity indexes and their associated realized volatilities measured since August 1.

IndexRealized VolatilityRealized Volatility FX Included

The results in column 1 were calculated independent of currency exposure, such that each volatility is based on index returns only. Column 2 index volatilities are measured from a USD perspective in that the results include the volatility of the index as well as the un-hedged currency exposure of a USD-based portfolio manager invested in each index. In all cases except for the FTSE 100, the un-hedged currency exposure is due to the EURUSD exchange rate (for the FTSE the exposure is due to GBPUSD rate).

Of startling note is the wide margin between the Euro-zone index volatilities and that of the UK-based FTSE-100. The decision by UK voters not not participate in the Euro is certainly presenting itself quite starkly in these statistics.

The results above were calculated using The RiskAPI Add-In, our unique software client which allows fund managers to access a whole spectrum of on-demand portfolio risk analysis calculations.

14 September 2011

S&P Sector Correlations

Earlier this year, the CME added a whole range of S&P E-mini sector index futures to their universe of available instruments. These contracts were created to provide a mechanism to directly hedge sector exposure according to the S&P Select Sector group of indices.

PortfolioScience has followed suit and introduced symbols for all CME S&P sector index futures contracts. With regards to current market conditions, the correlations of each of these sectors to the broader S&P 500 index are directly relevant. Currently, YTD correlation for each of the cash indices stands at:

SymbolNameYTD Correlation
IXYConsumer Discretionary0.959
IXRConsumer Staples0.891
IXVHealth Care0.939

Save for Energy and Utilities, most of these sectors are showing fairly high correlations to the market. This is likely a result of equities as an asset class suffering from systemic volatility due to the effects of the financial crisis rearing its head recently. Another useful analysis is the sector cross-correlations, which are presented below in the form of a correlation matrix. All calculations are using YTD data:

Using Excel's "conditional formatting" feature, the correlation matrix we initially generated using the RiskAPI Add-In was modified to highlight higher correlations in red and lower correlations in yellow. Note that Utilities (IXU) currently has the lowest cross-correlation of the group.

09 September 2011

Currency Risk: Major Event in the Swiss Franc

This week saw probably the largest one day move in a major currency in the last 20 years.

YTD realized volatility for USDCHF was at 12.99% as of Monday, September 5th. On Tuesday, September 6th, due to the SNB's announcement that it would purchase "unlimited quantities" of non CHF currencies to keep it at 1.20 (number of Swiss Franc per 1 Euro) or lower, the Franc experienced a devaluation of almost 9%. Quoted in Francs (USDCHF), the currency rate moved from 0.7865 to 0.8568.

To appreciate the magnitude of this one-day event, using YTD data, a single standard deviation represented a move of 0.81% in the USDCHF exchange rate. Tuesday's event resulted in a shift of 8.9%, equivalent to roughly TEN TIMES this amount.

Critics of G-7 central banking policies will, no doubt, jump on such data as proof that the stated mission of "price stability" is proving to be out of reach lately.

Current YTD realized volatility for USDCHF as of September 8th stands at 16.51%

The results above were calculated using The RiskAPI Add-In, our unique software client which allows fund managers to access a whole spectrum of on-demand portfolio risk analysis calculations.

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