What are we worried about?
Research Paper
August 1, 2006
Preview
By this time last year, we had experienced both the downgrades of Ford and General Motors and the correlation breakdown in synthetic CDOs. Two of our pieces last year dealt with these events. Hoping not to speak too soon, we remark that 2006 has yet to see a similar specific market event, and that risk managers are more interested in stress testing for macroeconomic events than examining particular positions. Unfortunately, macroeconomic indicators are not part of the typical risk model, so such strses testing is not something that can be done directly. We suggest a number of price-based indicators that inform us about overall market risks, but fit naturally into the standard risk model. We examine the behavior of these over the past six years, and investigate whether relationships between them have changed.
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