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Thomas Verbraken

Thomas Verbraken
Executive Director, MSCI Research

About the Contributor

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.

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Contributions by Thomas Verbraken

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  1. BLOG

    Long-Horizon Risk: The Past 50 Years 

    Apr 13, 2021 Monika Szikszai , Thomas Verbraken

    Fixed Income , Risk Management

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    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.

  2. BLOG

    How Inflation Could Affect Multi-Asset-Class Portfolios 

    Mar 3, 2021 Thomas Verbraken , Daniel Szabo

    Real Estate Investing , Fixed Income , Global Investing , Integrated Risk Management

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    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.

  3. BLOG

    Stress Testing Climate-Change Scenarios 

    Jan 28, 2021 David Lunsford , Thomas Verbraken

    Global Investing , ESG Research

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    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.

  4. BLOG

    Stress Testing Multiperiod Inflation Scenarios 

    Nov 19, 2020 Monika Szikszai , Thomas Verbraken

    Fixed Income , Risk Management

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    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.

  5. BLOG

    Stress Testing Inflation Scenarios 

    Sep 24, 2020 Thomas Verbraken , Daniel Szabo

    Fixed Income , Risk Management

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    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.

  6. BLOG

    The Risk of Risk Limits 

    Aug 5, 2020 Reka Janosik , Thomas Verbraken

    Risk Management

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    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.

  7. BLOG

    Four COVID-19 Scenarios: What Might Happen Next? 

    May 21, 2020 Thomas Verbraken , Juan Sampieri

    Fixed Income , Risk Management

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    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.

  8. BLOG

    How could coronavirus impact credit markets? 

    Mar 25, 2020 Juan Sampieri , Andy Sparks , Thomas Verbraken

    Risk Management , Fixed Income

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    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?”

  9. BLOG

    A coronavirus stress test for global markets 

    Mar 4, 2020 Chenlu Zhou , Juan Sampieri , Thomas Verbraken

    Fixed Income , Global Investing , Risk Management

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    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.

  10. BLOG

    The coronavirus epidemic: Implications for markets 

    Feb 12, 2020 Jun Wang , Zhen Wei , Thomas Verbraken

    Economic Exposure , Emerging Markets , Factor Investing , Fixed Income , Global Investing , Risk Management

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    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.

  11. 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.

  12. BLOG

    Stress testing Brexit: Deal or no deal? 

    Oct 9, 2019 Anikó Maráz , Thomas Verbraken , Maraz Aniko

    Global Investing , Models/Client Cases , Risk Management

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    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.

  13. BLOG

    Three scenarios for Fed rate cuts 

    Jul 23, 2019 Thomas Verbraken , Andy Sparks

    Economic Exposure , Fixed Income , Models/Client Cases

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    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?

  14. BLOG

    What could stress emerging markets? 

    May 24, 2019 Thomas Verbraken

    Global Investing , Risk Management , Economic Exposure , Emerging Markets

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    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?

  15. BLOG

    The risk in risk-parity strategies 

    Mar 13, 2019 Thomas Verbraken

    Fixed Income , Integrated Risk Management

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    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.

  16. PAPER

    Backtesting Year in Review: A Look at 2018 

    Feb 19, 2019 Balazs Vajda , Thomas Verbraken , Monika Szikszai

    Risk Management

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    In this semi-annual MSCI Model Backtesting Review publication, we evaluate the 2018 performance of the key risk methodologies available in RiskMetrics RiskManager. These models are tested on a broad set of fixed-income and equity portfolios, representing global equity and bond markets. We review the major market events of 2018 in the context of risk-model performance and include a deeper analysis of the ramifications of oil price dynamics and high-yield credit markets.

  17. BLOG

    What would a “No deal” Brexit mean for markets? 

    Jan 17, 2019 Thomas Verbraken

    Global Investing , Integrated Risk Management

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    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.

  18. BLOG

    Is the bond-equity hedge slipping away? 

    Nov 1, 2018 Thomas Verbraken , Michael Hayes

    Equity Themes , Fixed Income , Integrated Risk Management

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    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.

  19. BLOG

    Are Argentina and Turkey just the first dominoes to fall? 

    Oct 17, 2018 Thomas Verbraken , Limin Xiao

    Emerging Markets , Fixed Income , Risk Management , Integrated Risk Management

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    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?

  20. PAPER

    Backtesting Risk Models - August 2018 

    Aug 22, 2018 Balazs Vajda , Thomas Verbraken

    Risk Management

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    In this semi-annual update of the MSCI Model Backtesting Review, we evaluate the performance of three risk methodologies available in RiskMetrics RiskManager: Standard Normal Monte Carlo, Historical, and a new Fat-Tailed Monte Carlo methodology. The backtest was performed over the 12-month period ending June 30, 2018. Compared to previous studies, these models are tested on an extended scope of fixed income and equity portfolios, representing different segments of the U.S. and global equity and bond markets.

  21. BLOG

    What happens if Italy leaves the EU? 

    Aug 6, 2018 Thomas Verbraken

    Models/Client Cases , Global Investing , Integrated Risk Management

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    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.

  22. BLOG

    What if the U.S.-China trade war escalates? 

    Apr 13, 2018 Thomas Verbraken , András Urbán

    Integrated Risk Management

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    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.

  23. PAPER

    Backtesting Year in Review: A Look at 2017 

    Feb 19, 2018 Balazs Vajda , Thomas Verbraken

    Factor and Risk Modeling , Risk Management

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    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 has predicted risk.

  24. BLOG

    Breaking up is hard to do: Brexit and institutional portfolios 

    Mar 15, 2017 Thomas Verbraken

    Risk Management

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    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.

  25. PAPER

    Backtesting Year in Review - A look at 2016 

    Mar 3, 2017 Carlo Acerbi , Balazs Szekely , Thomas Verbraken

    Factor and Risk Modeling

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    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.

  26. PAPER

    Scenarios, Stress Tests and Strategies for Fourth Quarter 2016 

    Dec 8, 2016 Thomas Verbraken , Carlo Acerbi , Raghu Suryanarayanan , Remy Briand

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    A year marked by Brexit and Trump is ending with widespread uncertainty.

  27. 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 importance of checking compatibility between chosen shocks and the covariance matrix; the selection of an appropriate estimation window for the latter; portfolio-specific inputs on scenario design; and the importance of limiting the number of shocks.

  28. PAPER

    Modeling Future Shocks: MSCI Best Practices for Predictive Stress Testing 

    Sep 19, 2016 Thomas Verbraken , Carlo Acerbi

    Factor and Risk Modeling , Investing (Investment Management) , Portfolio Construction and Optimization , Risk Management

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    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 testing portfolios by first describing the scenario quantitatively, and then propagating the shockwave onto all relevant risk factors of an actual portfolio.

  29. PAPER

    Backtesting Risk Models - August 2016 

    Aug 26, 2016 Carlo Acerbi , Balazs Szekely , Thomas Verbraken

    Risk Management

    Download Document

    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.

  30. PAPER

    Scenarios, Stress Tests and Strategies for Second Quarter 2016 - The Rise of Populism 

    Jul 14, 2016 Raghu Suryanarayanan , Thomas Verbraken , Linda-Eling Lee , Carlo Acerbi , Manish Shakdwipee , Remy Briand

    Download Document

    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.

  31. PAPER

    Scenarios, Stress Tests and Strategies for First Quarter 2016 

    Apr 27, 2016 Thomas Verbraken , Remy Briand , Carlo Acerbi , Jahiz Barlas , Raghu Suryanarayanan , Roman Kouzmenko

    Risk Management

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    The central scenario inferred from markets has evolved this quarter to one where investors expect economies to muddle through global uncertainty but with heightened worries about the effectiveness of monetary and fiscal policies.

    Adverse and positive scenarios for the year reflect the following themes:

    • The tension between growth and deleveraging
    • The effectiveness of unconventional monetary and fiscal policies
    • The assessment of the windfalls or dangers of lower oil prices; and
    • The uncertainty created by geopolitics, including the possibility of the U.K. leaving the European Union, a surge of populist
    • sentiment worldwide, and tensions across the Middle East and Southeast Asia

    In this report, MSCI has modeled two scenarios — the effects of low oil prices and possible outcomes of a Brexit – and the possible effects on multi-asset class portfolios, based on MSCI’s macroeconomic risk modeling and stress testing capabilities:
     
    • A year of oil prices at $35 a barrel could cause a diversified multi-asset class portfolio invested globally to lose 5.1% or gain 3.5%, depending on the level of systemic risk present. A year of oil prices at $10 a barrel could cause global equities to fall nearly 23%.
    • Brexit could cause a global, diversified multi-asset class portfolio to lose between 1.4% and 6.9%, depending on the extent of spillover to Europe and beyond.

  32. BLOG

    How Brexit may impact your portfolio 

    Mar 21, 2016 Thomas Verbraken

    Factor Investing

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    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.

  33. PAPER

    Backtesting year in review - A look at 2015 

    Feb 12, 2016 Carlo Acerbi , Balazs Szekely , Thomas Verbraken

    Risk Management

    Download Document

    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.

  34. 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.

  35. The U.S. Federal Reserve is on the verge of raising short-term rates for the first time since the global financial markets crisis hit seven years ago. However, there remains considerable uncertainty about how well the Fed will fare in managing the exit strategy from its low interest-rate policy. Uncertainty about economic growth and inflation has become a central question for investors and policy makers and one that has crucial implications for the Fed’s exit strategy and investor portfolio returns. This paper stress tests three exit scenarios and quantifies their impact on asset class factor and global multi-asset class portfolio returns.

  36. PAPER

    Research Insight - Stress Testing a China Hard Landing 

    Oct 23, 2015 Zsolt Simon , Raghu Suryanarayanan , Carlo Acerbi , Jahiz Barlas , Oleg Ruban , Thomas Verbraken

    Factor and Risk Modeling , Risk Management

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    The persistent decline in Chinese equities and commodity prices this summer renewed investor concerns about a possible economic hard landing in the Asian giant. Combining the MSCI Macroeconomic Risk Model with RiskManager’s predictive stress testing capabilities, we illustrate how investors can quantify the potential impact of a China hard landing on global multi-asset class portfolios. We design two stress test scenarios: a medium contagion scenario and a high contagion scenario. Under the former, a sharp decline in Chinese GDP growth could result in a modest 3% decline in a hypothetical multi-asset portfolio, while the drop could reach 8.4% under the high contagion scenario.

  37. PAPER

    Backtesting Risk Models - Mid-Year 

    Sep 2, 2015 Balazs Szekely , Carlo Acerbi , Thomas Verbraken

    Factor and Risk Modeling , Risk Management

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    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.

  38. PAPER

    Backtesting Expected Shortfall - A Practical Guide 

    Jul 22, 2015 Carlo Acerbi , Thomas Verbraken , Balazs Szekely

    Factor and Risk Modeling , Risk Management

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    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 implications, given the widespread use of the measure across the financial industry.

  39. PAPER

    What If Greece Leaves the Euro? 

    Jun 30, 2015 Zsolt Simon , Vivek Sridhar , Carlo Acerbi , Thomas Verbraken

    Risk Management

    Download Document

    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 historical covariance data from the 2012 European Sovereign Debt crisis, plus evidence of changing exposure to Greek debt since then. Finally, our stress test scenario is applied on selected example portfolios for illustration purposes.

  40. PAPER

    Market Insight - 2013 Year in Review: Risk Model Backtesting - February 2014 

    Feb 6, 2014 Thomas Verbraken , Rachael Smith

    Risk Management

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    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 historical model produced better forecasts on average  (thanks to the 2008 crisis data being included). For equity portfolios, the least responsive model overestimated risk throughout 2013, while the more reactive models performed better. Looking back over the past three years of these backtesting studies, and accounting for both over and underestimation of risk, we see that different models have performed better in different years.  This raises both immediate practical implications and longer term questions, which we discuss in the conclusion.

Regulation