1、1 FLASH 17/07/19 BNPP-Global Risk Premium:Unchanged since last update 1 Risk premium model update The models return to the over-bought camp suggests that,all else equal,a pullback in the current rally()and/or differentiation()across risk assets is expected.Yet,as the model aims to match ex-ante risk
2、 with ex-post return,risk asset prices would likely remain stable or even continue appreciating,only if there is a considerable drop in risk(30-day implied volatility).Fig.1-2:BNP Paribas global risk premium model(BNPSGRP Index)Sources:BNP Paribas,Bloomberg LLP;as of 17 July 2019 Fully invested at t
3、he beginning of the yearLong positions despite US/China tensionsScale back positions in February-0.59(1.0)(0.8)(0.5)(0.3)0.00.30.50.81.0Jan-16Aug-16Mar-17Oct-17May-18Dec-18Jul-19Definition Zone;appetiteDefinition Zone;appetiteAppetite is low,but,at extreme values reversal probability is highPremium
4、is too low(appetite high);probability of reversal()()()()()()()()()()()()-150-90-303090-0.9-0.7-0.5-0.3-0.10.10.30.50.70.9Risk Premium LowRisk Premium HighPremium upPremium dfownRisk Premium LowRisk Premium HighPremium upPremium downTheoretically reduce positions when premium is too lowTrigger to ov
5、erweight;premium is abnormally highNOW1m AGORisk Appetite slowly up premium starts to converge back to equilibrium;Data dependence2m AGOShort Term Risk Premium CycleLATIN AMERICA STRATEGYPlease refer to important information at the end of the report FLASH EMERGING MARKETS 17 July 2019 Gabriel Gerszt
6、ein Global Head of Emerging Markets Strategy Banco BNP Paribas Brasil S.A.Performance of selected assets since triggering caution on 7 July 2019:EM CDX -5bp(*)BRL-USD +2.3%(*)TRY-USD -0.6%PLN-USD -1.2%EUR-USD -0.6%ARS-USD -0.8%EM MSCI -0.3%Barclays EM Agg -0.1%Barclays Global HY -0.1%As of 17 July 2
7、019|(*)outliers KEY MESSAGES The BNP Paribas global risk premium model continues in over-bought levels and that all else equal a pullback in the current rally()and/or increasing differentiation()or directionless dynamics across risk assets.In the last week of May,the model signalled that investor ri
8、sk appetite was critically low,indicating a potential appreciation in EM risk assets,and as a result we held our trade ideas to receive local currency rates in Brazil and Mexico and be long EM currencies,even after the US imposed tariffs on Chinese goods.On 7 July,we warned on the index reaching lev
9、els at which,a less aggressive stance or more defensive positions were considered.We use the index to assess short-term dynamics and not for structural calls.Main strategies:We switched into flatteners in Brazil(21s25s),SOAF(2s10s),Hungary(1s5s),and Mexico(5s10s).We are also receiving 2y TIIE on a s
10、pread over 2y US swaps.We are paying rates in Colombia(5y),Chile(1y),and opportunistically Brazil(April-20).In FX,most of our positions(CLP,BRL,ZAR,and HUF)are against the EUR;only PLN and CZK are against the USD.We are short ARS and KRW,and long TRY(hedged by 5y Xccy payers).In credit,we are short
11、protection in Russia and Turkey against Colombia(in all cases,using 5y CDS).TM FLASH 17/07/19Frequently asked questions If model values are at more supportive levels,does this mean that the market will rally?Not necessarily.The BNPSGRP index is a global/systemic indicator,meaning that there are time
12、s where the appreciation trend is not linear across the board.Also,values need to be at extremes to formally trigger a signal to buy/overweight(Figures 1-2)Do the signals work better for some asset classes?Back-testing suggests that the model can be a good contrarian/short-term indicator for equitie
13、s,EM credit,and EM FX in a majority of cases.Has the model worked well every single time it triggered a signal?No.While it has been profitable in more than 75%of the times,there have been periods where a trend has been so strong(or idiosyncratic events so dominant),that a contrarian signal has been
14、wrong.The performance between different asset classes has also varied.Annex:BNPP model:Inferring risk appetite Risk is not the same as shifts in risk appetite.For instance,there are periods when risk is at a low level but risk appetite is not particularly high,and periods when risk is high(deteriora
15、ting medium-term fundamentals)but investor appetite remains at a high level.To assess the odds of a market sell off,which is more important:Risk or risk appetite?First,we assume that the yield or premium that any risk asset pays over the risk-free rate is a function of:1)risk or structural component
16、s/fundamentals;2)appetite for risk;and 3)systemic or global risk(which cannot be diversified away).The expected return on any asset Y is then approximated by the following function:Expected Return(Y)=+(2)Where is the level of risk appetite,represents the systemic or global risk,and 2 is the variance
17、 of the asset.An increase of the level of represents an increase in risk aversion.The expected return can also be viewed as the difference between the current price of a risky asset and the hypothetical fair or equilibrium price,so:Expected Return(Y)=Long term price of Y Current price of Y=+(2)or 1
18、Current price of Y=Long term price of Y-(2)2 It is clear that risky asset prices can swing when:1)systemic risk changes(even when risk appetite or idiosyncratic risk remain constant);or 2)the appetite for risk varies(even when systemic and idiosyncratic risk are unchanged).A change in the appetite f
19、or risk would imply:Y/=-2 in which,the riskier the asset(2),the higher the price variation.Equations 1 and 2 are the basis of our approach in the sense that the riskier(more volatile)an asset is,the higher its exposure to changes in risk appetite.It also shows that shifts in general risk are differe
20、nt from time-varying changes in the appetite for risk.Following the above framework,our measure of risk appetite will be a function of abnormally high or low risk premium,and will flow from the correlation between asset risk(2)at time t-n and asset excess return at t.If the appetite for risk varies,
21、the correlation between risk ex ante and excess return ex post should be robust.To compute the correlation,we used Spearman rank as well.One of the problems with the commonly-used Pearson correlation is that it only measures linear relationships between two variables(a and b).For any relationship to
22、 exist,any change in a should have a constant proportional change in b.If the relationship is not linear,then the result is inaccurate.Also,the Pearson correlation is also affected by extreme values.On a daily basis,we calculate the rolling 1-month excess return of each of 23 different global assets
23、 and compare them with the level of risk ex ante.We rank their return and risk,and use Spearman correlation coefficient()among them to quantify changes in risk appetite.For a more details,see our introductory piece:Introducing the risk appetite model.Links to previous publications:BNPP-Global Risk P
24、remium:When the partys overBNPP-Global Risk Premium Model Triggers Overweight/Bullish positionFocus:The February scale backBNPP-Global Risk Premium Model more supportive for risk assets now Shifts in general risk are different from time-varying changes in the appetite for risk Our measure of risk ap
25、petite is a function of abnormally high or low risk premium LEGAL NOTICE This document has been written by our Strategist and Economist teams within the BNP Paribas group of companies(collectively“BNPP”);it does not purport to be an exhaustive analysis,and may be subject to conflicts of interest res
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