Research

Flexible Risk Analytics Platforms

By Robert Stamicar

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Overview

Measuring and interpreting the inherent risk of a portfolio is challenging. Since the COVID-driven market disruption of early 2020, we have witnessed periods of rising equity-bond correlation and elevated volatility in the Energy sector. More recently, market volatility climbed amid rising concerns about ongoing supply chain disruptions and rising inflation.

Developing risk platforms that are flexible enough to aid in ascertaining the evolving market risk landscape has become critical and essential. In fact, the 2008 Global Financial Crisis served as a catalyst for tighter regulatory control following a change in the perception of risk from an investment perspective. Risk functions can no longer be check-the-box exercises but rather must align with investment decisions to ensure accurate compliance with risk-control mandates.
Research shows that a comprehensive and valuable risk analytics platform must:

Be Flexible

  • To assess market and investment strategy, risk analytics platforms must integrate with other investment platforms and provide dynamic what-if analysis for allocation decisions.
  • Integrating risk analytics on a common platform provides enterprise-wide aggregation of risk and facilitates dialogue between investment professionals.

Include Stress Tests

  • Stress tests are more transparent and intuitive than risk estimates and are therefore essential complements to risk model analysis.
  • Stress tests overcome the shortcomings of risk models by estimating the impact of adverse market movements on a portfolio, capturing volatility jumps and changing correlation structures, and incorporating liquidity shifts.

Incorporate What-if Analysis

  • What-if analysis includes multiple risk statistics under one framework, aggregating bottom-up holdings to the account and portfolio levels to provide a more accurate exposure measure than a time-series approach.
  • Portfolio managers can then have a view into how risk statistics dynamically change as allocation weights are altered or an overlay position is added under various scenarios.
References

Robert Stamicar