Axioma Risk Monitor

Credit-risk premia fall, as share prices continue to rise
Euro strengthens ahead of EU rescue summit
Portfolio risk drops as developed and emerging markets decouple
Fixed Income Styles: Something New for 2020




Credit-risk premia fall, as share prices continue to rise


Risk premia on corporate bonds fell to their lowest levels since early March in the week ending July 17, 2020, as US stock indices posted their third consecutive weekly gain. The spread of 10-year BTP yields over German Bunds—a measure of the perceived relative risk between the two countries—also declined to a 20-week low of 1.67%, in anticipation of an EU-wide fiscal rescue package, which was to be negotiated at a leaders’ summit over the weekend. In contrast, risk-free sovereign yields—such as US Treasuries, British Gilts and German Bunds—once again hardly budged, finishing the week close to the levels of the previous Friday.

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Please refer to Figures 4 & 5 of the current Multi-Asset Class Risk Monitor (dated July 17, 2020) for further details.


Euro strengthens ahead of EU rescue summit


The euro climbed to its highest value against the US dollar since March 9 in the week ending July 17, 2020, as traders awaited the outcome of last weekend’s EU summit on a proposed coronavirus rescue fund. European Union leaders met in Brussels to discuss a fiscal support package of up to €750bn, financed through bonds issued by the European Commission and guaranteed by the block’s 27 member states. The common currency closed well above $1.14 on Friday, despite reports of a potential deadlock over the actual size of the package, indicating that investors remained optimistic about an eventual agreement.

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Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated July 17, 2020) for further details.


Portfolio risk drops as developed and emerging markets decouple


Short-term risk in Qontigo’s global multi-asset class model portfolio fell another percentage point to 11% as of Friday, July 17, 2020, as stock markets continued their recent upward trend. However, the share-price increases were mostly limited to developed markets, while many emerging countries—especially in Latin America—continued to be ravaged by surges in reported COVID-19 cases. China also gave up much of the previous week’s gains. On the flipside, however, the negative interaction with developed markets also meant that holding those securities reduced overall portfolio volatility. Emerging-market equities therefore experienced the biggest decrease in their risk contribution, both in absolute (-0.33%) and percentage (-2.3%) terms. Oil also saw its share of total portfolio volatility decrease by one percentage point to 5.2%, amid concerted efforts from OPEC and Russia to stabilize crude prices.

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Please refer to figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 17, 2020) for further details.

Fixed Income Styles: Something New for 2020


Factor investing has long been a staple of quantitative equity portfolio management and has generated a great deal of interest on the Fixed Income side in recent years. With the introduction of the Axioma Factor-based Fixed Income Risk Model, estimated through cross-section regression of issuer spread returns, we can study the properties of fixed income style factors such as Momentum, Value, Size and Beta to the market. And something interesting has happened during the COVID crisis:
  • Using monthly overlapping returns going back to 2002, we can estimate style factor volatility with an EWMA estimator with 1 year half-life and 4 year look-back. We compare both Fixed Income and Equity style factor volatilities computed under these settings. We use the Fixed Income covariance settings for the Equity model for ease of comparison; it should be noted that, for this reason, the equity factor volatility computed here differs from what is published in the Axioma World-Wide Equity Risk Factor Model, although the factor returns are the same.
  • Throughout this history, the Beta factor for both FI and Equity generally has had the largest volatility of all the style factors. The FI Beta vol has been fairly stable since 2007, fluctuating between 5% and 7.5%, while the Equity Beta vol has been mostly between 3% and 5% except for a period starting with the Global Financial Crisis.
  • Until March 2020 and COVID, that its, as can be seen in the chart. Suddenly Beta volatility shoots up. For Equity Beta vol, it’s back to GFC levels of 7%. But for FI Beta, this is something new and extraordinary, spiking up to over 19%. The other FI and Equity style factor vols also increase, most notably Size, but not to levels different from the GFC.
  • The impact of the new regime in Fixed Income Beta behavior has been explored in the blogpost “Corporate Credit Portfolio Construction: Targeting low-beta names during the COVID-19 Market Crisis”.

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Please refer to the Fixed Income Chart of the Week for interactive charts.


Stay Connected


Webinar | Making Sense of the COVID-19 Crisis With Quantitative Tools

Date: July 29, 2020
Time: 11:00 AM ET | 4:00 PM BST

In this webinar, Christoph Schon demonstrates how quantitative tools, such as factor risk models and stress tests, can be used to make sense of the recent market environment.

Register here >

Webinar | Qontigo Insight™ Quarterly Multi-Asset Risk Review

Date: August 12, 2020
Time: 11:00 AM ET | 4:00 PM BST

Join this webinar to hear more about how this ongoing disconnect between bond markets and stock markets affected multi-asset class portfolio risk.

Register here >

On the Blog

Emerging Markets lag China in equity-market gains, but also risk

China’s weight may dominate Emerging Markets, but returns and risks have gone their own way. Emerging Markets in aggregate have not mirrored China’s recent equity-market gains. And while China’s risk has spiked, Emerging Markets’ risk has continued to fall.

Sentiment as a Systematic Factor: Introducing Qontigo’s ROOF™ Market Portfolios

Used in conjunction with the ROOF Scores, the ROOF Market Portfolios can form the basis of a sentiment-aware active strategy. Active return will then come in the form of either premiums obtained from those wishing to acquire the desired exposures, or discounts from those wishing to dispose of the unwanted ones, and will be based on the supply and demand for risk in the market at that time.

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The Weakening Index Effect

The Index Effect has weakened significantly since 2011. The Index Effect is the phenomenon where stocks that are added to an index experience positive excess returns in the days before being officially added, while stocks that are removed from an index experience negative excess returns. The weakening of the Index Effect has been pronounced for large- and mid-cap stocks, though it still can be observed in many indexes with small-cap stocks.

Introducing ROOFTM Market Portfolios: Capitalizing on the Mood Swings of Markets?

Qontigo is pleased to introduce ROOFTM Market Portfolios. These portfolios will enable investors to benefit from the insights inherent in the ROOF scores, so they can not only track investor sentiment, but use it as an investment guide — thus providing increasingly meaningful opportunities for portfolio managers to enhance performance.

Qontigo Insight Q2 2020 Risk Review: The Storm After the Storm?

Equity markets posted one of the best quarters in more than a decade, but most were not able to cross into black territory for the year. Volatility — of benchmarks, sectors, risk model factors, etc. — came down from the year-to-date peaks, though remained high. Style factors saw an unusual performance, increased volatility, and large changes in factor correlations, which likely had a significant impact on active risk.


Qontigo Commentary: Coronavirus’ Impact on Markets

Over the past few months, the world has been greatly affected by the extensive spread of the COVID-19 virus. To help our subscribers better understand the impact of these events, Qontigo's Applied Research team put together a collection of market analysis and commentary.

Qontigo ROOF Scores

Qontigo's ROOF Scores were created to quantify market sentiment — bullish or bearish? ROOF is an acronym for Risk-On/Risk-Off market conditions; the Scores are calculated from the factor returns to eight style factors from Axioma’s fundamental factor risk models, plus two indicators of changing market volatility. 


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