Entering 2018, it may be worth keeping an eye on “unconventional” risks, including monetary policy risk, political risk, and geopolitical risk. This article examines one way of measuring such risks and shows how they may interact with both equity prices and volatility.
With U.S. tax reform legislation seemingly poised for enactment, one might assume that policy uncertainty generally—and tax policy uncertainty, specifically—is falling. The reality is more complicated.
The cost of rolling futures contracts, rather than the decline in commodity prices, has been the largest drag on commodity index performance over the past 10 years. Although difficult to implement, asset allocators’ best response may be to develop dynamic execution strategies to mitigate the roll return “tax.”
Momentum has been a consistent component of CTAs since 2004, but its influence on CTA performance remains lower than it once was. This highlights the potential importance of measuring both manager-specific and overall portfolio exposures in risk terms.
While the effects of monetary policy shocks are not directly observable, an analysis of historical evidence can help quantify the potential impact of such shocks on asset prices.
Investors seem to expect benign market conditions to continue, but they should remain aware of the historical tendency for rapid, positive shifts in volatility measures to occur.
Currency risk is embedded within CDS prices; if a country defaults, the value of its currency is likely to drop, to the detriment of investors with CDS exposure to that currency. The recently widening gap between European sovereign CDS priced in EUR and those priced in USD may therefore herald rising distress for the European Union as a whole.
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