{"id":53829,"date":"2016-06-30T04:00:00","date_gmt":"2016-06-30T02:00:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/news\/brexit-vote-ignites-equity-market-currency-and-style-factor-risk\/"},"modified":"2016-06-30T04:00:00","modified_gmt":"2016-06-30T02:00:00","slug":"brexit-vote-ignites-equity-market-currency-and-style-factor-risk","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/news\/brexit-vote-ignites-equity-market-currency-and-style-factor-risk\/","title":{"rendered":"Brexit vote ignites equity market, currency and style factor risk"},"content":{"rendered":"<p><quote>Main findings include:<\/p>\n<ul>\n<li> UK equity risk soared for w\/c 27 June 2016, with short-horizon expected volatility for the FTSE 350 jumping by more than eight percentage points &#8211; a 67% leap from the low level of risk in early June.<\/li>\n<\/ul>\n<ul>\n<li> Among UK sectors, Financials experienced the biggest changes, with their capitalisation weight falling, while their contribution to overall FTSE 350 risk climbed&#8211;though this change has been brewing for a while.<\/li>\n<\/ul>\n<ul>\n<li> In contrast to the single-country UK model, the biggest driver of change for Europe was higher currency risk; other components of risk (style, industry, and stock-specific) rose after the Brexit vote as well.<br \/>\n<\/quote><\/li>\n<\/ul>\n<p>Not good. The result of Friday\u2019s Brexit vote precipitated dramatic changes in equity and currency risk, driven by higher volatility and substantial changes in correlation. <\/p>\n<p><strong>Here is a rundown of some of the most notable shifts:<\/strong><\/p>\n<p><strong>U.K.<\/strong><\/p>\n<p>\u2022 UK equity risk soared for the week, with short-horizon expected volatility for the FTSE 350 jumping by more than eight percentage<br \/>\npoints&#8211;a 67% leap from the low level of risk in early June. While risk was already on the rise through Thursday (up more than four<br \/>\npercentage points from the prior week), Friday\u2019s action sent the numbers soaring. The upward blip in Medium-horizon risk was less<br \/>\npronounced, though the 2.7 percentage point increase from the prior week was still substantial for such a short period.<\/p>\n<p>\u2022 While factor volatility drove much of the change, factor correlations actually fell in aggregate (from the point of view of the mediumhorizon<br \/>\nmodel), all driven by Friday\u2019s market action<\/p>\n<p>\u2022 Factor returns went crazy on Friday. The biggest factor move by far was in Exchange Rate Sensitivity (1)<br \/>\n. For the five days ending<br \/>\nThursday, the factor return had been quite positive, +1.4%, among the best five-day periods of return the factor has experienced. Friday\u2019s<br \/>\nreturn was roughly a six-standard-deviation move in the opposite direction, and the five-day return dropped to -1.5%! In other words,<br \/>\nstocks with negative exposures (those that fare better when the currency weakens) far outpced those with positive exposures. While the<br \/>\ndirection of the moves was not surprising given the moves in the currency, the magnitude of the return was clearly quite unusual. The<br \/>\nreturn to the Size factor was also substantial (almost four standard deviations above average on Friday), meaning larger-cap stocks beat<br \/>\ntheir smaller-cap counterparts. Momentum and Liquidity had quite positive returns on Friday (more than two standard deviations above<br \/>\naverage), whereas Growth\u2019s return was more than five standard deviations below average. In many cases, factor returns were far in the<br \/>\nopposite direction from what we saw in other regions, which we will discuss later.<\/p>\n<p>\u2022 The biggest change in terms of major model blocks came from industries, although style and stock-specific risk ticked up, too.<\/p>\n<p>\u2022 Among sectors, Financials experienced the biggest changes, with their capitalization weight falling, while their contribution to overall<br \/>\nFTSE 350 risk climbed&#8211;though this change has been brewing for a while.<\/p>\n<p><strong>Europe<\/strong><\/p>\n<p>\u2022 Risk for FTSE Developed Europe also shot up, rising about eight percentage points from its early-June low, although the increase was<br \/>\nfrom a higher starting point than in the UK. In addition, medium-horizon horizon risk was up more than five percentage points for the five<br \/>\ndays ended last Friday, nearly twice the risk increase in the UK.<\/p>\n<p>\u2022 In contrast to the single-country UK model, the biggest driver of the change for Europe was higher currency risk (our Europe model is<br \/>\ndenominated in euros). Still, other components of risk (style, industry, and stock-specific) rose on Friday as well. Interestingly, aggregate<br \/>\ncountry risk seems to show the smallest increase of the major components. While volatility went up in most, the correlation between the<br \/>\nUK and a number of European countries fell.<\/p>\n<p>\u2022 Interestingly, the UK equity risk factor within the European model saw only a nominal increase in risk from Thursday to Friday, and it<br \/>\nremains toward the low end of country risk ranks in both the European and Worldwide models. For most of 2016, the UK\u2019s contribution to<br \/>\nrisk in FTSE Developed Europe has been higher than what would be expected given its capitalization weight, but the gap has widened.<\/p>\n<p>\u2022 Factor returns for Europe were also of unusual magnitude in many cases. Momentum (both medium and short-term), and Leverage had<br \/>\nreturns that were at least two standard deviations above average on Friday, whereas almost all other style factor returns were unusually<br \/>\nnegative for the day. Since most of these returns reflected a sharp reversal from the prior few days the five-day returns were actually quite<br \/>\nunremarkable.<\/p>\n<p><strong>Other markets<\/strong><\/p>\n<p>\u2022 Axioma\u2019s maps showing the countries with big changes in volatility and correlation were covered with upward-facing arrows. Almost no<br \/>\ncountries were spared \u2013 the impact of the Brexit vote clearly went well beyond the UK and Europe.<\/p>\n<p>\u2022 For most of the other markets we track closely, short-horizon risk ticked up, but to a much smaller degree than in the UK or Europe.<br \/>\nAsset-asset correlations were also up sharply, but more so in developed than in emerging markets. Globally, median correlations reached<br \/>\nlevels rarely seen since the financial crisis.<\/p>\n<p>\u2022 While large-cap stocks prevailed in the UK, smaller stocks won the day elsewhere, with returns that were -2 to almost -4 standard<br \/>\ndeviations below average. Other major differences in the direction of style returns between the UK and other markets (which moved<br \/>\nmore-or-less in the same direction as each other) included Value, Volatility (most markets saw low Volatility fare well with a multiplestandard-deviation<br \/>\ndaily return, but in the UK higher Volatility actually did better), market sensitivity (similar to Volatility) and Liquidity.<br \/>\nMedium-Term Momentum had a hugely positive day almost across-the-board. Growth had an extremely positive return in the US but<br \/>\nnegative almost everywhere else. Overall, based on the outsized returns, we expect to see a sudden and sharp increase in style factor<br \/>\nvolatility. <\/p>\n<p><strong>And now\u2026<\/strong><\/p>\n<p>So what does it all mean? Risk has taken a sudden turn upward, driven by higher volatility and asset correlations. Thanks to the higher<br \/>\nasset correlations, portfolio factor risk will be higher relative to specific risk. The unusual magnitude of returns will likely have caused some<br \/>\nhavoc in portfolios, but since it was in many cases a reversal from the prior few days\u2019 returns, the havoc should be mitigated to some<br \/>\nextent. Factor volatility will, of course, be higher, leading to higher active and total portfolio risk. Of course, we will continue to keep a close<br \/>\neye on all of these elements. That said, based on history, we expect market volatility to stop increasing in the not-too-distant future, but it<br \/>\nwill likely settle at its currently higher level, since significant economic and political uncertainty remains.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Axioma Risk Monitor investigates the result of the Brexit vote and how it precipitated dramatic changes in equity and currency risk, driven by higher volatility and substantial changes in correlation.<\/p>\n","protected":false},"author":1,"featured_media":53827,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1470],"tags":[1809,1655,1657,1651,1437,2087,2068],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/53829"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=53829"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/53829\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/53827"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=53829"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=53829"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=53829"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}