Whitepaper

Market Risk Monitor - April 2017

Apr 28, 2017
By BlackRock

Current market risk environment

 


The risk rally that started in the second quarter of 2016 continued through the first quarter of 2017, in spite of persistent economic and political uncertainty. At the end of the quarter, our historical data-based metrics suggest a relatively benign picture, with implied volatility, for instance, remaining low for both equities and fixed income and correlations between assets being lower than in much of the recent past. This in turn implies that diversification opportunities are high and that risk-bearing assets have outperformed those with lower risk.

Market Risk Monitor

Ed Fishwick and Tara Sharma from the Risk & Quantitative Analysis Team discuss the current risk conditions and the implications for investors.

But a further important feature of markets over the recent past has been the propensity for outcomes to be concentrated in time, with periods of low volatility and generally benign market conditions being punctuated by aperiodic episodes of much higher volatility and pronounced range movements.

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What are the implications?

While this has been a good period in which to hold risk assets for portfolios where short-term mark to market risk is less relevant, investors do need to be aware of the risk of sudden and sharp spikes in risk aversion resulting from exogenous events, and the accompanying increase in volatility. A description of market risk conditions on the basis of short-term volatility, valuation, and recent correlation patterns is always incomplete, and under current circumstances this seems especially true.