Continue active refreshing of this index's data?

Continue active refreshing of this index's data?

Equity Risk Monitors — November 1, 2022

Equity Risk Monitor Highlights | Week Ended October 28, 2022

  • China models converge, others remain far apart
  • UK risk settles down

China models converge, others remain far apart

Following on a theme illustrated last week, risk spreads between the four variants of the China Risk Model have converged at about 17% annualized volatility after the Chinese market fell, moving  in the opposite direction of many other global markets.  In contrast to the convergence in Chinese markets, risk models in other markets have done the opposite with statistical models forecasting lower risk for indices in their regions/countries:

See graphs from Risk Monitors as of 28 October 2022:

In general, statistical models are showing lower risk than their counterpart fundamental models, and the short horizon models are showing higher risk than the medium horizon models.  It would appear that China may be catching up to the rest of the world in this respect as the opposite of both generalizations stated above has been the case in China throughout the 2nd and 3rd quarters of 2022. 

Since Statistical models are not bound by a priori structure, it is generally assumed that risk forecasts from statistical models are leading indicators with respect to the levels of risk in a given market.  This assumption does not always hold, of course, for there are some instances where the structure of market risk closely matches the structure of the fundamental models- particularly when there is clear return dispersion amongst industries and countries, as there was during the COVID crisis and as there has been through much of 2022 as markets adjust to the three-headed crisis of energy supply shocks driven by war, generalized inflation and global central banks’ aggressive policy response. 

UK risk settles down

The resignation of Liz Truss and selection of Rishi Sunak to succeed her short tenure has calmed the British market, as risk remained flat, in contrast to the prior month:

See graphs from UK Equity Risk Monitors as of 28 October 2022:

In addition, the market’s reaction looked positive, as more than 70% of the stocks in the index outpaced the market overall. This breadth mirrors what we saw in the US, although Developed Markets ex-US saw less than half the stocks outpace the index.