MSCI Risk Monitor: RiskMetrics Europe

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1 MSCI Risk Monitor: RiskMetrics Europe June 216 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 12 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 11. 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 2 Short- versus long-term correlations page 3 Summary of surprise days page 4 Individual risk factor detail pages 5-1 Risk factor descriptions page 11 In May 216 there were nine return exceedances for the risk factors covered in this report. In general volatility bands tightened, with all risk factors, except the GBP Swap 3M, recording their lowest volatility of the past three months. Several risk factors even registered one-year low volatility (see pages 2 and 4). Over the past month, interest rates and credit spreads tightened. Eurostoxx equity Index gained in value, while the V Stoxx dropped. The euro depreciated against the U.S. dollar and British pound, but appreciated against the Norwegian kroner and Swiss franc (see page 4). On May 18, a poll on the Brexit referendum indicated that the camp in favor of staying in the European Union was leading. On the same day we saw the UK two-year government yield increase and the British pound strengthen against the euro, both by more than two standard deviations. On May 24, another poll confirmed that the Remain voters were still leading; that day the British pound posted a positive return exceedance relative to the euro, as did the Eurostoxx. The V Stoxx volatility index, on the other hand, fell sharply (see pages 5 and 7).

2 Forecast Volatility Volatility Stats for EWMA (decay factor of.97) June 216 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 2Y EUR Swap 5Y EUR Govt 2Y GBP Swap 3m Prior Month Date Range: May 1, 216 May 31, 216. Three-Month Date Range: March 1, 216 May 31, 216. One-Year Date Range: June 1, 215 May 31, Risk Forecast of Daily Relative (Log) Changes over Prior Month, Prior Three Months, and Prior Year (decay =.97) One-Year Date Range: June 1, 215 May 31, 216. 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 -3.57% 3.32% 3.2% 3.66% % 3.92% 3.2% 5.4% 7.17% 3.33% 2.39% 5.4% itraxx Europe XOVER -2.5% 2.68% 2.48% 2.95% -25.8% 3.14% 2.48% 3.89% 6.31% 3.11% 2.28% 4.4% EUR/USD -2.8%.55%.5%.59% 2.46%.61%.5%.73% 1.54%.7%.5%.88% GBP/EUR 2.22%.6%.56%.64% 1.94%.63%.56%.72% -6.6%.65%.53%.79% Eurostoxx 1.16% 1.32% 1.26% 1.43% 4.% 1.48% 1.26% 1.81% % 1.53% 1.13% 1.98% V Stoxx % 4.21% 3.85% 4.54% -18.6% 4.43% 3.85% 4.84% % 5.2% 3.85% 7.68% CHF/EUR -.81%.25%.24%.26% -2.22%.28%.24%.36% -6.56%.39%.24%.76% NOK/EUR -.94%.49%.47%.52% 1.74%.56%.47%.66% -8.18%.65%.47%.86% Prior Month Date Range: May 1, 216 May 31, 216. Three-Month Date Range: March 1, 216 May 31, 216. One-Year Date Range: June 1, 215 May 31, 216. 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. 215 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 2

3 Correlation Changes Long-term versus Short-term Correlation Structure June 216 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 GBP Swap CHF/EUR NOK/EUR 2Y 5Y Main Crossover 2Y 3m UK Govt 2Y % 57% -23% -24% -12% 27% 27% -18% 47% 11% -3% 9% EUR Swap 5Y 71% % -25% -24% 1% 3% 27% -19% 47% -5% -3% 13% itraxx Europe OTR -4% -2% % 95% 17% -26% -78% 49% -6% 5% 3% -36% itraxx Europe XOVER -37% -5% 93% % 19% -25% -8% 51% -6% 5% 2% -36% EUR/USD -2% -11% -24% -17% % -6% -33% 14% 13% -5% -25% -2% GBP/EUR 38% 14% -3% -29% -24% % 37% -19% -11% 1% 18% 3% Eurostoxx 34% 12% -62% -69% -21% 48% % -55% 3% -2% 2% 39% V Stoxx -22% -3% 45% 5% 5% -35% -71% % -3% 4% 5% -2% EUR Govt 2Y 54% 55% -25% -26% 19% -9% -2% -8% % 6% -11% -9% GBP Swap 3m 14% 5% 1% 4% -11% 6% 1% -6% 25% % -5% -2% CHF/EUR -8% -12% 8% 7% -26% 9% 2% -3% -33% -9% % 14% NOK/EUR 24% 17% -44% -49% 6% 39% 56% -4% -9% -18% 11% % Three-Month Date Range: March 1, 216 May 31, 216. Three-Year Date Range: June 1, 213 May 31, 216. * 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. 215 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 June / / /8 3/1 4/29 UK Govt 2Y EUR Swap 5Y Itraxx Main Itraxx Cros s over EUR/USD GBP/EUR Euros toxx V Stoxx EUR Govt 2Y GBP Swap 3m CHF/EUR NOK/EUR /18 1/8 1/28 2/18 3/9 3/3 4/19 5/1 5/3 Date Range: December 1, 215 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 4

5 Basis points Basis points Risk Factor Plots June UK Two-year Government Bond 2. EUR 5-year Swap UK Two-year Government Bond: 1 Exceedance EUR 5-year Swap: 2 Exceedances 1 1 4/ / / /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 5

6 Percent Percent Risk Factor Plots June itraxx Europe OTR 2. itraxx Europe XOVER OTR itraxx Europe OTR: 2 Exceedances itraxx Europe XOVER OTR: 1 Exceedance / / /11 3/1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 6

7 Percent Percent Risk Factor Plots June EUR/USD 2. GBP/EUR EUR/USD: 3 Exceedances GBP/EUR: 2 Exceedances / /18 5/ /3 4/ /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 7

8 Percent Percent Risk Factor Plots June Euro Stoxx 5 Index 2. VSTOXX Euro Stoxx 5 Index: 4 Exceedances VSTOXX: 4 Exceedances 4 3 3/11 4/13 5/ /24 4/ /29-1 4/ /24 3/1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, 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 June EUR Two-year Government Bond 2. UK 3-month LIBOR EUR Two-year Government Bond: 2 Exceedances UK 3-month LIBOR: 6 Exceedances /4 3/ /1 4/22 5/ /7 4/29 5/17 3/1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 9

10 Percent Percent Risk Factor Plots June CHF/EUR 2. NOK/EUR CHF/EUR: 2 Exceedances NOK/EUR: 3 Exceedances /12 1 4/ / / /1 3/1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, /1 3/1 3/21 3/31 4/11 4/2 4/29 5/11 5/2 5/31 Date Range: March 1, 216 May 31, MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 1

11 Appendix Risk Factor Definitions June 216 CHF/EUR: CHF/EUR Foreign Exchange Rate derived from CHF/USD and EUR/USD mid quotes snapped at 11 EST. EUR 1-year Government Bond: Euro Government 1-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 11 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 11 EST. Appears in the report each month. GBP/USD: Mid quote for GBP/USD Foreign Exchange Rate snapped at 11 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 18 began trading on March 22, 21 and contains 4 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 11 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 11 EST. Short Sterling Three-month Volatility: Implied volatility of three months atthe-money options on Short Sterling interest rate futures. UK 1-year Government Bond: UK Government 1-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. 215 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 11

12 June 216 Client Service Information is Available 24 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 India Seoul Singapore Sydney Taipei Thailand Tokyo (toll free) (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. 215 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 12

13 June 216 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 194 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 For more than 4 years, MSCI s research-based indexes and analytics have helped the world s leading investors build and manage better portfolios. Clients rely on our offerings for deeper insights into the drivers of performance and risk in their portfolios, broad asset class coverage and innovative research. Our line of products and services includes indexes, analytical models, data, real estate benchmarks and ESG research. MSCI serves 98 of the top 1 largest money managers, according to the most recent P&I ranking. For more information, visit us at Contributors To The Series Mannan Abbasi Thomas Verbraken 215 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document Page 13

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