The Landscape of Risk – S&P Dow Jones Indices

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S&P Dow Jones Indices has  published a research highlighting risks ahead for investors.

The Landscape of Risk”, written by Craig Lazzara and Tim Edwards, global head and director of Index Investment Strategy team respectively.

In their report, Lazzara and Edwards noted that volatility and dispersion has been depressed across most developed markets recently.

“Both may continue to grind down or bump along the bottom, but the next big move is likely to be an increase,” they pointed out.

The research highlighted that large movements in the market occur with far greater frequency than one might expect. “Multiple-standard deviation moves in the market occur with an alarming frequency,” the report stressed.

However, S&P Dow Jones Indices noted, there is opportunity in crisis for market indices. “If an investor bought when volatility was high, they might experience short-term pain, but were likely to achieve long-term gain,” the report read.

Volatility, correlation and dispersion combine to create a three-dimensional “landscape of risk”.  Evidence highlighted in the research  illustrates how the same level of market volatility can arise from different combinations of correlation and dispersion.  These combinations suggest how and when seemingly idiosyncratic events can assume systemic significance.

Those who can anticipate trends in volatility have always been able to “time the market.”  The results of this paper suggest that trends in dispersion may also help navigate between market factors.  Taken together, a multidimensional view of risk may help distinguish crisis from opportunity, S&P said.

Click here to read full report.


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