MSCI Risk Monitor: RiskMetrics Europe

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1 April 5 Volatility and Correlation for Key Risk Drivers in Europe About This Report Highlights Under a standard RiskMetrics forecasting model, this monthly Risk Monitor reports on the evolution of risk forecasts for key risk factors chosen for their relevance to European investments. The factors are selected each month, depending on market developments, from the list on page. The report examines changes in volatility and correlation behavior, and identifies days on which factor returns were a surprise relative to the risk forecasts. This Risk Monitor may be used to assess risk forecasts of the key factors specifically, or to provide context for the performance of risk forecasts on more general portfolios. Forecast volatility over the past year page Short- versus long-term correlations page 3 Summary of surprise days page Individual risk factor detail pages 5- Risk factor descriptions page In March 5, we observed 5 return exceedances for the risk factors monitored in this report. Three foreign exchange risk factors (EUR/USD, GBP/USD and NOK/EUR) and two interest rate risk factors (EUR Swap 5Y and EUR Govt Y) reached peak volatility during the past months. At the same time, yields declined and EUR weakened against USD (see pages and ). The European Central Bank (ECB) began its bond-buying program on March 9 ( 5bn/week), pushing European short-term yields deeper into negative territory, further weakening the Euro and lowering the yield for longer-dated bonds. We observed negative return exceedances for the UK Y, EUR Y and EUR Y interest rates, for the EUR 5Y Swap rate, and for the EUR relative to GBP and USD (see pages 5, 7 and 9). On March 8, the U.S. Federal Reserve expressed caution about economic growth, suggesting a less aggressive timeline for an interest rate hike. This allowed the Euro to recover partially, and a positive return exceedance for EUR/USD was observed on March (see page 7). On March 9, the Norwegian Central Bank announced maintaining its interest rates at current levels instead of cutting them as expected. On the same day, the Norwegian Krone appreciated by more than 3 percent relative to the Euro, and the NOK/EUR return exceeded the -sigma volatility forecast (see page ).

2 Forecast Volatility Volatility Stats for EWMA (decay factor of.97) April 5. Risk Forecast of Daily Absolute Changes in Rates (BPS) over Prior Month, Prior Three Months, and Prior Year (decay =.97) Volatility stats for EWMA.97 Prior Month Prior Three Months Prior Year Return Avg. Vol. Min. Vol. Max. Vol. Return Avg. Vol. Min. Vol. Max. Vol. Return Avg. Vol. Min. Vol. Max. Vol. UK Govt Y EUR Swap 5Y EUR Govt Y EUR Govt Y Prior Month Date Range: March, 5 March 3, 5. Three-Month Date Range: January, 5 March 3, 5. One-Year Date Range: April, March 3, 5.. Risk Forecast of Daily Relative (Log) Changes over Prior Month, Prior Three Months, and Prior Year (decay =.97) One-Year Date Range: April, March 3, 5. Prior Month Prior Three Months Prior Year Return Avg. Vol. Min. Vol. Max. Vol. Return Avg. Vol. Min. Vol. Max. Vol. Return Avg. Vol. Min. Vol. Max. Vol. itraxx Europe OTR.67%.75%.6%.9% -.66%.95%.6% 3.% -6.8%.7%.99% 3.75% itraxx Europe XOVER.6%.58%.3%.7% -.%.8%.3% 3.3% -6.8%.78%.%.6% EUR/USD -.5%.66%.56%.7% -.%.6%.8%.7% -.8%.%.3%.7% GBP/EUR.3%.5%.8%.5% 7.7%.5%.%.56%.7%.38%.7%.56% Eurostoxx.73%.%.9%.8% 7.5%.3%.9%.6% 6.95%.7%.68%.6% V Stoxx 3.7% 6.58% 6.% 6.93% -3.7% 7.3% 6.% 8.56%.5% 6.95% 5.7% 8.85% GBP/USD -3.9%.8%.%.5% -.79%.%.35%.5% -.96%.35%.3%.5% NOK/EUR -.%.8%.7%.9%.8%.77%.67%.9% -.67%.5%.9%.9% Prior Month Date Range: March, 5 March 3, 5. Three-Month Date Range: January, 5 March 3, 5. One-Year Date Range: April, March 3, 5. Highlighted prior month volatilities indicate that the volatility level reached its minimum/maximum value of the last three months or twelve months. The relevant threemonth/ twelve-month minimum/maximum values are highlighted as well. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page

3 Correlation Changes Long-term versus Short-term Correlation Structure April 5 Top Right Matrix: Correlation of daily returns of the past three years. Bottom Left Matrix: Correlation of daily returns of the past three months. UK Govt EUR Swap Itraxx Itraxx EUR/USD GBP/EUR Eurostoxx V Stoxx EUR Govt EUR Govt GBP/USD NOK/EUR Y 5Y Main Crossover Y Y UK Govt Y % 8% -% -5% % 6% 7% -3% 5% 57% 7% -3% EUR Swap 5Y 6% % -33% -3% 3% -% 3% -5% 5% 8% 5% % itraxx Europe OTR -8% -8% % 95% -5% 5% -78% 68% -% -35% -3% -9% itraxx Europe XOVER -6% -3% 96% % -3% % -77% 67% -9% -33% -% -% EUR/USD -% 9% % % % -6% 5% -8% 5% % 57% -6% GBP/EUR 6% -8% -5% -% -69% % -% -3% -% -5% 3% % Eurostoxx % % -73% -76% -5% 3% % -75% % % 7% 7% V Stoxx -7% -9% 7% 68% 7% -% -78% % -6% -7% -3% -6% EUR Govt Y % 3% 3% % 6% -7% % -5% % 7% 9% -% EUR Govt Y 6% 83% -5% -6% 5% -3% 3% -% 37% % 8% -5% GBP/USD 5% % -% -8% 6% % % -6% -7% % % 3% NOK/EUR 5% % -7% -% -6% 5% % -5% 7% 7% -8% % Three-Month Date Range: January, 5 March 3, 5. Three-Year Date Range: April, March 3, 5. * Cells are highlighted according to the difference between the short-term (three-month) and long- term (three-year) correlation, normalized by the standard deviation of the short-term correlation. Light green (red) highlighted cells indicate a recent correlation in excess of one standard deviation higher (lower) than the long-term value. Dark green (red) highlighted cells indicate a recent correlation in excess of two standard deviations higher (lower) than the longterm value. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 3

4 Surprise count Risk Factor Surprise Days April 5 9 /5 8 / 7 6 / 5 /3 3 /6 / /5 3/6 3/ UK Govt Y EUR Swap 5Y Itraxx Main Itraxx Cros s over EUR/USD GBP/EUR Euros toxx V Stoxx EUR Govt Y EUR Govt Y GBP/USD NOK/EUR / / /8 /8 /8 /8 /7 3/ 3/3 Date Range: October, March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page

5 Basis points Basis points Risk Factor Plots April 5. UK Two-year Government Bond. EUR 5-year Swap UK Two-year Government Bond: Exceedances EUR 5-year Swap: 5 Exceedances 8 6 /6 3/6 5 / 3/ /3 3/ -6 3/8-5 /6-8 3/ - / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 5

6 Percent Percent Risk Factor Plots April 5. itraxx Europe OTR. itraxx Europe XOVER OTR itraxx Europe OTR: Exceedance itraxx Europe XOVER OTR: Exceedances / /8-6 3/ / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 6

7 Percent Percent Risk Factor Plots April 5. EUR/USD. GBP/EUR EUR/USD: 8 Exceedances GBP/EUR: 7 Exceedances.5 /9 3/.5 /5 / 3/ /3 /8 3/ /5 / /3 /6 3/6 3/ /3 / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 7

8 Percent Percent Risk Factor Plots April 5. Euro Stoxx 5 Index. VSTOXX Euro Stoxx 5 Index: 3 Exceedances VSTOXX: Exceedance /8 /9 3 3/ /5 - / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 8

9 Basis points Basis points Risk Factor Plots April 5. EUR Two-year Government Bond. EUR -year Government Bond EUR Two-year Government Bond: 5 Exceedances EUR -year Government Bond: 6 Exceedances 3 3/6 8 6 / /5 3/ 3/8 3/ /6 / /3 3/9 3/ - - / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 9

10 Percent Percent Risk Factor Plots April 5. GBP/USD. NOK/EUR GBP/USD: 7 Exceedances NOK/EUR: Exceedances.5 /7 3/ 3 3/9.5 /8 /5 3/ /5 / 3/6 3/ 3/ / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. / / / /3 / /9 3/ 3/ 3/ 3/3 Date Range: January, 5 March 3, 5. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page

11 Appendix Risk Factor Definitions April 5 CHF/EUR: CHF/EUR Foreign Exchange Rate derived from CHF/USD and EUR/USD mid quotes snapped at EST. EUR -year Government Bond: Euro Government -Year Zero Rate, constructed by MSCI from on-the-run German Bunds. EUR Two-year Government Bond: Euro Government Two-Year Zero Rate, constructed by MSCI from on-the-run German Bunds. EUR Three-month LIBOR: Three-month EUR Swap Zero Rate, constructed by MSCI from deposit rates. EUR 5-year Swap: 5-year Euro Swap Zero Rate constructed by MSCI from broker swap quotes. Appears in the report each month. EUR/USD: Mid quote for EUR/USD Foreign Exchange Rate snapped at EST. Appears in the report each month. Euribor Three-month Volatility: Implied volatility of three months at-themoney options on Euribor interest rate futures. Euro Stoxx 5 Index: The Euro Stoxx 5 equity index using end-of-day closing prices. Appears in the report each month. GBP/EUR: GBP/EUR Foreign Exchange Rate derived from GBP/USD and EUR/USD mid quotes snapped at EST. Appears in the report each month. GBP/USD: Mid quote for GBP/USD Foreign Exchange Rate snapped at EST. itraxx Europe OTR: Five-year itraxx Europe index spread level, constructed by MSCI using the most liquid five-year itraxx Europe Index and smoothed over a period when a new series becomes on-the-run. Appears in the report each month. itraxx Europe Senior Financials OTR: Five-year itraxx Europe Senior Financials index spread level, constructed by MSCI using the most liquid fiveyear itraxx Europe Senior Financials Index and smoothed over a period when a new series becomes on-the-run. itraxx Europe XOVER OTR: Five-year itraxx Europe Crossover index spread level, constructed by MSCI using the most liquid five-year itraxx Europe Crossover Index and smoothed over a period when a new series becomes on-the-run. Appears in the report each month. itraxx LevX S6: Five-year itraxx Senior LevX Series 6 derived index spread level. Series 8 began trading on March, and contains constituents. itraxx SOVX WE OTR: Five-year SovX Western Europe spread level, constructed by MSCI using the most liquid five-year itraxx SovX Western Europe Index and smoothed over a period when a new series becomes onthe-run. JPY/EUR: JPY/EUR Foreign Exchange Rate derived from EUR/USD and USD/JPY mid quotes snapped at EST. MSCI EM Europe Index in EUR: The MSCI Emerging Market Europe equity index using end-of-day closing prices quoted in Euros. MSCI Europe Index in EUR: The MSCI Europe equity index using end-of-day closing prices quoted in Euros. NOK/EUR: NOK/EUR Foreign Exchange Rate derived from EUR/USD and USD/NOK mid quotes snapped at EST. Short Sterling Three-month Volatility: Implied volatility of three months atthe-money options on Short Sterling interest rate futures. UK -year Government Bond: UK Government -Year Zero Rate, constructed by MSCI from on-the-run UK Gilts. UK Two-year Government Bond: UK Government Two-Year Zero Rate, constructed by MSCI from on-the-run UK Gilts. Appears in the report each month. UK Three-month LIBOR: Three-month GBP Swap rate quote from BBA. VSTOXX: The Euro Stoxx 5 Volatility Index using end-of-day closing prices. Appears in the report each month. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page

12 April 5 Client Service Information is Available Hours a Day Americas Europe, Middle East & Africa Asia Pacific Americas Atlanta Boston Chicago Monterrey New York San Francisco Sao Paulo Toronto (toll free) CapeTown Frankfurt Geneva London Milan Paris (toll free) China North China South Hong Kong Seoul Singapore Sydney Taipei Tokyo (toll free) (toll free) (toll free) (toll free) (toll free) Notice and Disclaimer This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the Information ) is the property of MSCI Inc. or its subsidiaries (collectively, MSCI ), or MSCI s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the Information Providers ) and is provided for informational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from MSCI. The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used to create indexes, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services. The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION. Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or willful default of itself, its servants, agents or subcontractors. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. The Information should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. All Information is impersonal and not tailored to the needs of any person, entity or group of persons. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy. It is not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index. MSCI does not issue, sponsor, endorse, market, offer, review or otherwise express any opinion regarding any fund, ETF, derivative or other security, investment, financial product or trading strategy that is based on, linked to or seeks to provide an investment return related to the performance of any MSCI index (collectively, Index Linked Investments ). MSCI makes no assurance that any Index Linked Investments will accurately track index performance or provide positive investment returns. MSCI Inc. is not an investment adviser or fiduciary and MSCI makes no representation regarding the advisability of investing in any Index Linked Investments. 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page

13 April 5 Index returns do not represent the results of actual trading of investible assets/securities. MSCI maintains and calculates indexes, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments. The imposition of these fees and charges would cause the performance of an Index Linked Investment to be different than the MSCI index performance. The Information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material differences between back tested performance results and actual results subsequently achieved by any investment strategy. Constituents of MSCI equity indexes are listed companies, which are included in or excluded from the indexes according to the application of the relevant index methodologies. Accordingly, constituents in MSCI equity indexes may include MSCI Inc., clients of MSCI or suppliers to MSCI. Inclusion of a security within an MSCI index is not a recommendation by MSCI to buy, sell, or hold such security, nor is it considered to be investment advice. Data and information produced by various affiliates of MSCI Inc., including MSCI ESG Research Inc. and Barra LLC, may be used in calculating certain MSCI equity indexes. More information can be found in the relevant standard equity index methodologies on MSCI receives compensation in connection with licensing its indexes to third parties. MSCI Inc. s revenue includes fees based on assets in investment products linked to MSCI equity indexes. Information can be found in MSCI s company filings on the Investor Relations section of MSCI ESG Research Inc. is a Registered Investment Adviser under the Investment Advisers Act of 9 and a subsidiary of MSCI Inc. Except with respect to any applicable products or services from MSCI ESG Research, neither MSCI nor any of its products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and neither MSCI nor any of its products or services is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Issuers mentioned or included in any MSCI ESG Research materials may include MSCI Inc., clients of MSCI or suppliers to MSCI, and may also purchase research or other products or services from MSCI ESG Research. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, IPD, FEA, InvestorForce, and other MSCI brands and product names are the trademarks, service marks, or registered trademarks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor s. Global Industry Classification Standard (GICS) is a service mark of MSCI and Standard & Poor s. About MSCI MSCI Inc. is a leading provider of investment decision support tools to investors globally, including asset managers, banks, hedge funds and pension funds. MSCI products and services include indexes, portfolio risk and performance analytics, and ESG data and research. The company s flagship product offerings are: the MSCI indexes with over USD 9.5 trillion estimated to be benchmarked to them on a worldwide basis; Barra multi-asset class factor models, portfolio risk and performance analytics; RiskMetrics multi-asset class market and credit risk analytics; IPD real estate information, indexes and analytics; MSCI ESG (environmental, social and governance) Research screening, analysis and ratings; and FEA valuation models and risk management software for the energy and commodities markets. MSCI is headquartered in New York, with research and commercial offices around the world. As of June 3,, as reported on September 3 by evestment, Morningstar and Bloomberg Nov Contributors To The Series Mannan Abbasi Edoardo Marcantoni Mark Schmude Thomas Verbraken 5 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 3

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