Investors deconstructing risk more, Axioma survey shows

Investors are increasingly differentiating various sources of risk, a notable change from their reaction in past crises, according to a quarterly survey from New York-based consulting firm Axioma.

The latest Risk Review indicates that despite the ongoing crisis in Europe, Q2 changes in risk were relatively subdued, and increased short-term risk was countered by a decrease in medium-term risk.

“Risk estimates and correlations tend to spike in a major crisis, but that’s not what our data showed in the second quarter,” said Melissa Brown, Senior Director, Applied Research and co-author of the report.

“Both risk and correlations remained well below their historical highs, underscoring the fact that investors are increasingly differentiating sources of risk-whether by country, currency, industry, etc.-compared with past crises.”

An Axioma study focusing on European risk revealed that the beleaguered economies of Greece and Spain were decoupling from the rest of Europe, in terms both predicted risk and correlations.

Country risk now makes up a larger portion of total risk, as currency risk-specifically for the euro-declined in the second quarter.

“Correlations overall rose in the quarter, but ended the period nowhere near prior peaks, suggesting that investors are not in the midst of a one-theme market,” said Brown.

Commenting on trends in Europe, Brown said: “Risk forecasts for major European countries and the euro appear to be stable or declining. In contrast, higher and still-increasing levels of risk appear to be concentrated in Greece and Spain, along with lower correlations with other markets.”

Statistical risk factors did not seem to pick up anything that was not reflected in the fundamental models. “This could be a positive sign, indicating an absence of lurking risk and, hence, the reduced likelihood of a ‘surprise’ in the coming months,” said Brown.

Founded in 1998 and headquartered in New York with additional offices in Atlanta, San Francisco, London, Hong Kong, Singapore, Geneva and Sydney, Axioma helps financial firms manage risk, increase returns and improve operational efficiency. The full report can be accessed on the Axioma Insight page.


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