Thomas Verbraken is a member of MSCI’s Risk Management Solutions research team. His work focuses on risk methodologies, as well as the evolution of banking regulation and stress testing. Thomas holds an MSc in Civil Engineering and a PhD in Applied Economics from KU Leuven. He is a CFA charterholder.
Research and Insights
Articles by Thomas Verbraken
How Eurozone Inflation and ECB Policy Could Impact Markets6 mins read Blog | Jun 27, 2022 |
In a portfolio stress test, we consider the uncertainty around eurozone inflation and the European Central Bank’s policymaking. We outline four scenarios and their potential impact on the bloc’s economy and a hypothetical multi-asset-class portfolio.
China at a Crossroads: Three Scenarios for InvestorsBlog | May 9, 2022 |
The recent COVID-19 lockdowns in China and their impact on global supply chains add another concern for investors, on top of the Russia-Ukraine war. We model three scenarios for China and their potential spillover effects on global portfolios.
Net-Zero Alignment: Managing Portfolio Risk Along the Net-Zero JourneyReport | Apr 25, 2022 |
Given climate risk’s multifaceted nature and the long time horizon on which climate change is unfolding, investors face an elevated level of uncertainty when making decisions. What approaches can they take as they seek to manage these risks?
Fed Policy and the Threat of Stagflation7 mins read Blog | Apr 4, 2022 |
Investors are increasingly focused on inflation and the Fed’s tightening of monetary policy. With the Russia-Ukraine war and resulting sanctions, they may also worry about slowing economic growth. We model three economic scenarios’ potential impact on markets.
How ‘Greenflation’ Could Impact Bond Returns6 mins read Blog | Jan 14, 2022 |
Investors and policymakers are increasingly focused on the fact that a transition to a low-carbon economy could result in “greenflation,” which could put upward pressure on long-term interest rates and in turn lead to downward repricing of bond portfolios.
How Climate Change Could Impact Credit Risk6 mins read Blog | Oct 20, 2021 |
Investors are increasingly focused on gauging the risks related to climate change. We investigated how various climate scenarios could impact the credit risk of portfolios. In one scenario, 16% of investment-grade issuers could migrate to high yield.
What Could a Rate Hike Mean for Portfolios?6 mins read Blog | Jul 22, 2021 |
Although the Federal Reserve may not begin raising rates anytime soon, U.S. and global markets are scrutinizing the Fed’s communications about the likely course of policy actions. We consider three scenarios for the timing of policy responses.
How Might Inflation Impact Funding Ratios?5 mins read Blog | Jul 14, 2021 |
We analyzed two multiperiod inflation scenarios to understand how the funding ratios of defined-benefit pension funds could evolve in each and what they could mean for a pension fund in terms of special contributions over the next 10 years.
The Pressure of the Crowd: Stress Testing Thematic Indexes6 mins read Blog | May 17, 2021 |
Some investors may be concerned about crowding within the fast-growing thematic-investing segment. Using MSCI’s stock-crowding model, we identify crowded themes and run stress tests to understand how they might respond to an equity sell-off.
Long-Horizon Risk: The Past 50 Years4 mins read Blog | Apr 13, 2021 |
For long-horizon investors that aim to ride out volatility, short-term risk measures may be insufficient. We used multiperiod stress testing to evaluate one- and five-year returns of hypothetical multi-asset-class portfolios using 50 years of history.
How Inflation Could Affect Multi-Asset-Class Portfolios5 mins read Blog | Mar 3, 2021 |
Market participants are hotly debating whether U.S. monetary and fiscal policy may cause inflation. We consider four scenarios — reflation, disinflation, an overheated economy and stagflation — and their potential impact on multi-asset-class portfolios.
Stress Testing Climate-Change Scenarios7 mins read Blog | Jan 28, 2021 |
Regulators around the world are upping the ante on climate-related financial disclosures. How can investors stress test potential exposures to these changes in policy? We take a look within Europe.
Stress Testing Multiperiod Inflation Scenarios5 mins read Blog | Nov 19, 2020 |
Will inflation rear its ugly head in the U.S.? Although the outcome of the U.S. elections might have lowered inflation expectations, investors can prepare for scenarios where inflation goes up. In this stress test, we examine three scenarios for inflation over varying time horizons.
Stress Testing Inflation Scenarios6 mins read Blog | Sep 24, 2020 |
Market-implied expectations indicate modest inflation. But some observers are concerned inflation may significantly rise, while others fear deflation. We discuss four inflation scenarios — and their potential implications for stocks and bonds.
The Risk of Risk Limits6 mins read Blog | Aug 5, 2020 |
In times of heightened volatility, risk limits can protect against equity-market drawdowns. While such measures can dampen portfolio losses, they may also have an impact on long-term returns, particularly in case of a sharp V-shaped market recovery.
Four COVID-19 Scenarios: What Might Happen Next?Blog | May 21, 2020 |
Our latest COVID-19 stress test looks at four potential financial-market outcomes ranging from a swift V-shaped recovery to a pessimistic L-shaped scenario, in which outbreaks recur and lockdowns return well into 2021.
How could coronavirus impact credit markets?Blog | Mar 25, 2020 |
While newspaper headlines are focused on volatile stock markets stemming from the COVID-19 pandemic, credit markets are not immune. Our latest stress test asks, “What would it mean for portfolios if losses reached 2008 levels?”
A coronavirus stress test for global marketsBlog | Mar 4, 2020 |
After the coronavirus spread to multiple continents, markets recorded the worst week since the crisis. How much further could markets drop if epidemic turns into pandemic? Our stress test indicates room for further losses.
The coronavirus epidemic: Implications for marketsBlog | Feb 7, 2020 |
The toll from the coronavirus has been felt throughout societies, leading to repercussions on the global economy and financial markets. We examine investor impact through markets’ economic exposures to China and factors and by stress testing portfolios.
Stress testing US-China trade warsBlog | Oct 21, 2019 |
Amid ongoing U.S.-China trade tension, we have updated our stress test to consider three scenarios for how the situation could unfold — and their impact on currency, bond and equity markets around the world.
Stress testing Brexit: Deal or no deal?Blog | Oct 9, 2019 |
Brexit has roiled markets since U.K. voters chose “leave” in the June 2016 referendum. We used our stress-testing model to examine how markets could react to deal and no-deal scenarios.
Three scenarios for Fed rate cutsBlog | Jul 23, 2019 |
A consensus has emerged that the Federal Reserve will lower rates in the coming months, but investors remain uncertain over the timing and magnitude of the cuts. What impact could three rate-cut scenarios have on markets?
What could stress emerging markets?Blog | May 24, 2019 |
Emerging-market equities and USD-denominated EM sovereign bonds started 2019 with a bang, but recent market turbulence caused by the U.S.-China trade standoff raises a pressing question: What could trigger the next EM downturn?
The Risk in Risk-Parity StrategiesBlog | Mar 13, 2019 |
The relationship between bonds and equities may be especially important to investors who employ a risk-parity approach. In our analysis, as the bond-equity correlation turned strongly positive, the effect on risk-parity portfolios was much greater than that on traditional 60/40 equity/bond portfolios.
What Would a “No deal” Brexit Mean for Markets?Blog | Dec 7, 2018 |
Financial markets are increasingly edgy about prospects for the U.K. Parliament’s expected Dec. 11 vote on a Brexit deal with the European Union.
Is the bond-equity hedge slipping away?Blog | Nov 1, 2018 |
In October, the 10-year U.S. Treasury yield hit a 7-year high in response to strong economic news, contributing to the second major equity sell-off this year.1 If positive moves in yield continue to drive down equities, this would mean an end to the hedge between stocks and bonds that has been in effect since around 2002. Investors may seek alternative means of diversification, with potentially deep ramifications for strategic asset allocation decisions and multi-asset class strategies.
Are Argentina and Turkey just the first dominoes to fall?Blog | Oct 17, 2018 |
Argentina and Turkey have experienced sharp corrections in their currency and debt markets over the past couple of months, leading investors to worry about possible contagion to other emerging-market (EM) countries. Are other emerging markets heading in the same direction?
What happens if Italy leaves the EU?Blog | Aug 6, 2018 |
With populist policies on the rise, globally, many believe Italy’s coalition government could add to the EU’s challenges by pursuing populist strategies that could further disrupt both equity and bond markets. We consider two scenarios – a severe and mild one – with very different implications.
What if the U.S.-China Trade War Escalates?Blog | Apr 12, 2018 |
Markets appear to have priced in the recent tariffs, but the risk of a broader trade war still looms. Market scenarios based on economic studies suggest an all-out trade war could drive global equity prices down another 10%, with U.S. investors receiving the worst of it.
Backtesting Year in Review: A Look at 2017Report | Feb 19, 2018 |
Measures employed by risk managers and portfolio managers, such as Expected Shortfall and Value at Risk, are designed to calculate the risk level of a portfolio. But some risk models may work better than others for different asset classes and for different market conditions. Besides backtesting Value-at-Risk and Expected Shortfall, we ranked four types of simulations models available in RiskMetrics RiskManager using the MSCI Model Scorecard, an innovative tool that measures how well a model...
Breaking Up is Hard to Do: Brexit and Institutional PortfoliosBlog | Mar 13, 2017 |
The United Kingdom is about to begin negotiations over its exit from the European Union. Though the process could take up to two years, the triggering of talks leaves institutional investors to assess how Brexit, at least at the outset of negotiations, may affect their portfolios.
Backtesting Year in Review - A look at 2016Report | Mar 3, 2017 |
For the year ending December 31, 2016, we analyzed the 12-month risk forecast accuracy of four categories of simulation models available in RiskMetrics RiskManager: Monte Carlo, historical, filtered historical and weighted historical.
Scenarios, Stress Tests and Strategies for Fourth Quarter 2016Report | Dec 8, 2016 |
A year marked by Brexit and Trump is ending with widespread uncertainty.
Stress Testing Portfolios: Best Practices for Shockwave PropagationReport | Sep 19, 2016 |
Scenario propagation is the second stage of predictive stress testing practices, following scenario definition. This paper illustrates common pitfalls and suggests best practices for a robust propagation of the shockwave of a prospective scenario onto all relevant risk factors of a financial portfolio. The central observation: Risk managers must guard against “noise” in the predictions. Diagnostic statistics can reduce noise and ensure meaningful predictions. Key best practices include: the...
Modeling Future Shocks: MSCI Best Practices for Predictive Stress TestingReport | Sep 19, 2016 |
The aftermath of the 2008 global financial crisis taught the risk industry that expert judgment and economic insight may help investors anticipate and avoid exposure to major financial downturns by using forward-looking models, such as predictive stress tests. But there is no consensus on how to create these scenarios. In this paper, we portray MSCI best practices for stress testing in a flowchart that guides risk managers through a series of steps that lead to a structured way of stress...
Backtesting Risk Models - August 2016Report | Aug 26, 2016 |
For the July 2016 backtesting review, MSCI began by analyzing how each of four types of simulation models available in RiskMetrics RiskManager—Monte Carlo, historical, filtered historical and weighted historical—performed over the year ended June 30, 2016.
Scenarios, Stress Tests and Strategies for Second Quarter 2016 - The Rise of PopulismReport | Jul 14, 2016 |
The decision by a majority of U.K. voters to leave the European Union shines a light on fissures between perceived winners and losers from globalized markets and highlights for investors the importance of factoring the consequences of inequality and popular discontent into their views. The latest edition of MSCI’s “Scenarios, Stress Tests and Strategies” examines the potential impacts on institutional portfolios of a tide of populist sentiment across Europe and the U.S.
How Brexit May Impact your PortfolioBlog | Mar 11, 2016 |
Britain’s leaving the European Union would send the U.K. and Europe into the unknown with possibly major consequences for multi-asset class portfolios.
Backtesting Year in Review - A Look at 2015Report | Feb 12, 2016 |
For this year’s backtesting review, MSCI began by analyzing how each of four types of simulation models available in RiskMetrics RiskManager—Monte Carlo, historical, filtered historical and weighted historical—performed over the year ended December 31, 2015.
Scenarios, Stress Tests and Strategies for 2016Report | Jan 19, 2016 |
Heading into 2016, MSCI examined 12 stress points globally to be used in quantifying the effect on portfolios of a range of shifts in markets, liquidity and the macroeconomy. These stress points include the prospect of additional interest-rate hikes by the Federal Reserve, weakness in the eurozone and a deceleration in Chinese economic growth.
Stress Testing a China Hard LandingReport | Oct 23, 2015 |
The persistent decline in Chinese equities and commodity prices this summer renewed investor concerns about a possible economic hard landing in the Asian giant.
Backtesting Risk Models - Mid-YearReport | Sep 2, 2015 |
Risk measures, such as Expected Shortfall and Value at Risk, are designed to calculate the risk of a portfolio. But different risk models may work better than others for different asset classes and in varying time horizons. The MSCI Model Scorecard provides an innovative tool designed to help select the best risk model in terms of Expected Shortfall (ES) and Value at Risk (VaR) predictivity.
Backtesting Expected Shortfall - A Practical GuideReport | Jul 22, 2015 |
Expected shortfall (ES) has attracted controversy as a measure of a portfolio’s risk since it was introduced in 2001. One reason for this was that some critics suggested ES could not be backtested. Last year, however, MSCI proposed a way of backtesting expected shortfall. This development is especially important in the light of the Basel Committee on Banking Supervision’s recent decision to adopt ES in place of VaR. The ability to backtest expected shortfall also has broader...
What If Greece Leaves the Euro?Report | Jun 30, 2015 |
Stress Testing the Greek Exit Scenario Using MSCI RiskManager This Product Insight uses MSCI RiskManager to examine the potential effects of a Greek exit from the euro, explaining the detailed assumptions behind our stress test design. We make use of RiskManager's predictive stress test tool, which starts with user-defined hypothetical shocks on a few core risk factors (singled out as the drivers of the global crisis) then propagates shocks on all markets. In this current exercise, we employ...
Market Insight - 2013 Year in Review: Risk Model Backtesting - February 2014Report | Jul 15, 2014 |
This Market Insight presents the results of an annual backtesting study, using RiskManager, applied to four standard risk models. The study includes fixed income and equity portfolios during the 2013 calendar year. While the first half of 2013 was quiet, volatility increased after June 2013. For fixed income portfolios, comparing ex-ante risk forecasts with ex-post returns, the more reactive models showed some underestimation of risk in the turbulent period, while the more stable...