1、1 FLASH 02/07/19 BNPP-Global Risk Premium:When the partys over 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 with e
2、x-post return,risk asset prices are only likely to remain stable or even continue appreciating,if there is a considerable drop in risk(30-day implied volatility).Fig.1-2:BNP Paribas global risk premium model(risk appetite)Sources:BNP Paribas,Bloomberg LLP;as of 1 July 2019 Contrarian recommendation
3、in the middle of a bearish marketFully invested at the beginning of the yearScale back positions in February-0.57(1.0)(0.8)(0.5)(0.3)0.00.30.50.81.0Dec-15Jul-16Feb-17Sep-17Apr-18Nov-18Jun-19Definition Zone;appetiteDefinition Zone;appetiteAppetite is low,but,at extreme values reversal probability is
4、highPremium is too low(appetite high);probability of reversal()()()()()()()()()()()()(150)(90)(30)3090-90%-70%-50%-30%-10%10%30%50%70%90%Risk Premium LowRisk Premium HighPremium upPremium dfownRisk Premium LowRisk Premium HighPremium upPremium downTheoretically reduce positions when premium is too l
5、owTrigger to overweight;premium is abnormally highNOW3m AGORisk Appetite slowly up premium starts to converge back to equilibrium;Data dependenceShort Term Risk Premium CycleLATIN AMERICA STRATEGYPlease refer to important information at the end of the report FLASH EMERGING MARKETS 02 July 2019 Gabri
6、el Gersztein Global Head of Emerging Markets Strategy Banco BNP Paribas Brasil S.A.Performance of selected assets since triggering long/overweight signal on 27 May 2019:EM CDX -42bp BRL-USD +5.2%TRY-USD +7.0%PLN-USD +2.3%EUR-USD +1.0%EM FX Index +2.3%EM MSCI +4.3%Barclays EM Agg +3.2%Barclays Global
7、 HY +2.6%As of 1 July 2019 KEY MESSAGES The BNP Paribas global risk premium model suggests risk assets are nearing over-bought levels and that all else equal a pullback in the current rally()and/or increasing differentiation()across risk assets is therefore expected.In the last week of May,the model
8、 signalled that investor risk 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 selected EM currencies,even after the US imposed tariffs on Chinese goods.Our appro
9、ach assesses short-term dynamics and is not used for structural calls.Our decision to enter 2019 fully-invested and to scale back positions at the end of January was based on it.Rates strategy:we closed the majority of our directional positions and switched into relative value or flattening trades i
10、n Brazil,South Africa,Hungary,and Mexico.We are paying rates in Colombia(5y IBR)and Chile(1y CLPxCAM).In FX,65%of our long positions(CLP,BRL,and HUF)are against the EUR;only PLN and CZK are against the USD.TM FLASH 02/07/19 Frequently asked questions If model values are at more supportive levels,doe
11、s this mean that the market will rally?Not necessarily.The BNPSGRP index is a global/systemic indicator,meaning that there are times 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 signal
12、s work better for some asset classes?Back-testing suggests that the model can be a good contrarian/short-term indicator for the S&P 500,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
13、times,there have been periods where a trend has been so strong(or idiosyncratic events so dominant),that a contrarian signal has been 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 ins
14、tance,there are periods when risk is at a low level but risk appetite is not particularly high,and periods when risk is high(deteriorating 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?Firs
15、t,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 components/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 foll
16、owing function:Expected Return(Y)=+(2)Where is the level of risk appetite,represents the systemic or global risk,and 2 is the variance 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 o
17、f 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 Current price of Y=Long term price of Y-(2)2 From the equations above,it is clear that risky asset prices can swing when:1)systemic risk changes(even when risk appeti
18、te 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 for 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
19、 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 different from time-varying changes in the appetite for risk.Following the above framework,our measure of risk appetite will be a function of abnorm
20、ally 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,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
21、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 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,t
22、he 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 and compare them with the level of risk ex ante.We rank their return and risk,and use Spearman correlation coefficient()among them to quanti
23、fy changes in risk appetite.For a more details,see our introductory piece:Introducing the risk appetite model.Links to previous publications:BNPP-Global Risk Premium Model Triggers Overweight/Bullish position Focus:The February scale back BNPP-Global Risk Premium Model more supportive for risk asset
24、s now Shifts in general risk are different from time-varying changes in the appetite for risk Our measure of risk appetite 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(
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