Extended Viewer

Research Bulletin - Adjusting Risk Models for a Euro Exit

Euro area sovereign risks continue to dominate headlines as political uncertainty and market volatility increase. Investors have been preparing for the possibility that one or more countries may exit the common currency, and so has MSCI.  How will RiskMetrics and Barra risk models adjust for this event?  This paper discusses the challenges of modeling risk where no historical series exist for a new currency. We describe our preparation for the event day risk proxy, then we detail the changes to our modeling approach that accounts for a new European currency, or currencies. Finally, we provide a technical appendix describing our post-exit methodology.