Tue, Dec 1, 2015
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

BofA Merrill Lynch Global Research introduces Global Financial Stress Index

Tuesday, November 30, 2010
Opalesque Industry Update - BofA Merrill Lynch Global Research has introduced the Global Financial Stress Index (GFSI), a comprehensive, cross-market gauge of risk, hedging demand and investment flows. The index is designed to help investors identify market risks earlier and more accurately than commonly used risk indicators, such as the VIX index.

The GFSI composite index aggregates over twenty measures of stress across five asset classes and various geographies, measuring three separate kinds of financial market stress: risk, as indicated by cross-asset measures of volatility, solvency and liquidity; hedging demand, implied by the skew of equity and currency options; and investor appetite for risk, as measured by trading volumes as well as flows in and out of equities, high-yield bonds and money markets.

Back-testing of the GFSI since 2000 illustrates that sharp rises in the index over short periods of time would have had a high degree of accuracy in forecasting sell-offs in assets, particularly global equities, commodities and U.S. high-yield bonds.

“Since the global financial crisis, risk appears to have become as important to investors as return,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “The GFSI measures risks not normally visible in public markets by incorporating assets trading in the over-the-counter market. We believe its breadth and depth make it a better measure of financial market stress than the VIX, which is based on U.S. options data alone.”

The GFSI’s sub-components illustrate differences in market, solvency, liquidity, and tail risk that are priced daily into financial markets. This can help uncover relative value opportunities across assets and their derivatives, as well as allow investors to identify the cheapest tail hedges. Differences between sub-indices measuring investment flows and broader market health can also help detect significant market turning points and contrarian “buy” signals.

“Understanding diverse sources of global financial stress has become increasingly important in today's markets,” added Benjamin Bowler, global head of Equity Derivatives at BofA Merrill Lynch Global Research. “Knowing which risks are important and, more importantly, how to hedge them without overpaying is key to successful investing. The GFSI can be an important tool for traders, investors and asset-allocators to make better investment and risk management decisions across asset classes.”

Currently, the GFSI is .26 which indicates marginally elevated market stress. The Flow sub-index touched a two-year low earlier this month indicating large inflows into risky assets and out of money market funds. This optimistic positioning contrasts with stress levels signaled by both the Risk and Skew sub-indices, which remain elevated. The last time such a similar discrepancy between Skew and Flows occurred was in April 2010, just before a sharp decline in the S&P 500.

(press release)



What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. David Einhorn's hedge fund plunged 5.2% in November, set for 2015 loss[more]

    From Bloomberg.com: David Einhorn’s main hedge fund at Greenlight Capital fell 5.2 percent in November and is poised for only its second losing year in almost two decades. The losses bring the fund’s yearly drop to almost 21 percent, according to an e-mail sent to clients that was obtained by Bloomb

  2. Other Voices: Hedge fund marketing and the selling cycle[more]

    By Bruce Frumerman. How long is the selling cycle now? That’s a question my financial communications and sales marketing consulting firm has been asked on a regular basis by hedge fund firm owners and sales people, ever since we opened the doors to our firm in 1987 pre-crash. Wa

  3. People - Solus Alternative Asset Management adds chief strategist from BTIG[more]

    From PIonline.com: Daniel Greenhaus joined hedge fund manager Solus Alternative Asset Management as managing director and chief strategist. He will work closely with Chris Bondy, Solus’ chief economist, managing director and executive vice president, said Chris Pucillo, CEO and chief investmen

  4. Commodities - Stung by oil, distressed-debt traders see worst losses since '08[more]

    From Bloomberg.com: It’s mid-November, but for investors who trade in the debt of distressed companies, the year’s already done -- and they lost. Hedge funds that specialize in the debt are grappling with their worst declines in seven years. Funds managed by Knighthead Capital Management, Candlewood

  5. Regulatory - Major changes in partnership audit procedures contained in 2015 Budget Act[more]

    Contained in the Bipartisan Budget Act of 2015, signed by President Obama on November 2, is a rather complex provision that materially changes how partnerships are audited. Generally effective for tax years beginning after December 31, 2017, the so-called “TEFRA” and “Electing Large Partnership” rul