White Paper

Signs of Equity Market Strain

Richard Yasenchak, CFA Senior Managing Director, Head of Client Portfolio Management
Vassilios Papathanakos, PhD Distinguished Researcher

Key Ideas

  • We introduce a new risk profile of the equity market – a collection of five reliable indicators of market strain – to help identify different risk regimes and associated tail-risk.
  • Conventional risk metrics such as standard deviation, VIX and GARCH tend to be focused on the past or, at best, current levels of volatility; the potential impact of tail-risk events is often overlooked.
  • Risk metrics that comprise the Intech Equity Market Stress Monitor address different aspects of the equity markets. They are based on decades of market data and are expressed in a percentile range relevant to a specified equity index.
  • Using this monitor, investors can gain additional insight to risk regimes and focus on achieving their investment objectives with greater confidence, and better oversight of their risk budget.

Investors may attempt market timing based on expectations, which requires them to take a positive or negative view on near-term market performance. This is a directional forecast of returns, which is extremely difficult to get consistently right. Instead, we prefer to consider the risk profile of equity markets and identify different risk regimes and their associated tail-risks. Unlike directional changes, a higher likelihood of tail events is generally announced via departures from the underlying market stability.