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Fluctuation of asset classes | Volatility

In the previous blog we looked at the coherence of investment categories. We know that this correlation increases in times of crisis. In this article we look at the volatility of the markets. The volatility increases sharply in times of crisis. Particularly in the case of risk-bearing instruments such as equities, we often see considerable plunges in the markets because there are many more sellers than buyers at the same time. But what should you pay attention to in times of crisis?

22 Jun 2020

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To measure is to know
Volatility of the portfolio itself is the most important measure of risk management. This fluctuation is measured in various forms, for example as Value-at-Risk. When the volatility of the investments is compared to a benchmark, it is also referred to as Tracking Error. Institutional investors often determine their risk appetite and then test it by means of risk (ex-ante) analyses. If such analyses measure too low/high risk values, it may be advisable to review the composition of the portfolio.
Characteristic in times of crisis is that risk measures usually go up considerably. The question in that case is whether the risks in times of crisis are also aligned with the bandwiths formulated in their investment policy.


Knowledge is power
In addition to being prepared for times of crisis, it is also important to know how the instruments in the portfolio respond to changes in the market. Particularly in the case of derivatives that react non-linearly to changes in the price of the underlying can lead to substantial fluctuation in valuation. Think, for example, of options. Writing put options, in which you assume the obligation to buy certain securities at a certain price in the near future, has a double undesirable effect in times of crisis; the put options first get more valuable because of the fall in the value of the underlying asset. In addition, they also become worth more because of the increased implied volatility.


Be prepared
Good preparation is key when it comes to coping well in times of crisis. It is important to know in advance what can happen and how the instruments in which investments are made respond to extreme developments. In addition, be prepared for the opportunities that a crisis has to offer. Investors tend to react irrationally in times of crisis, for example out of panic or simply the obligation to sell at certain levels. It may be advisable to buy in just at those moments and above all not to panic.
In the next blog we look at risk scenarios and stress tests.


About CACEIS
KAS BANK N.V. has been part of CACEIS since September 2019. CACEIS is a European specialist for the custody and administration of securities and high-quality risk and reporting services. We focus entirely on providing securities services to professional investors in the pensions and securities world. The acquisition of KAS BANK N.V. strengthens CACEIS' position in the Netherlands, Germany and the United Kingdom. Our combined product range makes us market leader in custody services and fund administration in Europe. CACEIS is part of Crédit Agricole, the world's largest cooperative financial institution.

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Sander van den Broeke

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Sander van den Broeke

Risk Advisor
+31 20 557 26 12