Sun, Apr 30, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

SunGard’s APT models impact of Euro breakup, sees shocks across asset classes

Friday, February 03, 2012
PIIGS exit scenario would bring 40% drop in Euro yield curve and a 20% drop in Euro equities

Opalesque Industry Update - SunGard’s APT risk system has modelled different Euro breakup scenarios, using a global factor model incorporating macro-economic factors to estimate cross-asset class effects. The results cover the impact of five main Euro breakup scenarios across FX, interest rates, equities, oil and credit spreads.

In creating the scenarios, APT drew on a variety of leading recent economics research and focused on the mechanisms by which shocks are transmitted between different asset classes, reviewing the two most recent sovereign debt shocks to markets, in March 2010 and August 2011. These historical scenarios helped APT calibrate the relative scale of expected volatility shocks for each explanatory factor. Scenarios are described by a set of shocks to both level and volatility of any set of macro variables (explanatory factors) which can be represented within the factor model.

This approach helped APT generate five different potential scenarios of concern:
1. One country leaves - Greece
2. Two countries leave - Greece & Portugal
3. Five countries leave - Greece, Portugal, Ireland, Italy, Spain
4. One country leaves – Germany
5. Total collapse of Euro zone

Full shock scenario values chart attached below, highlights include:

• The departure of Greece and Portugal would lead to a 15% rise in the Euro against the dollar, a 20% fall in Eurozone yields (ie the swap curve), a 15% fall in Eurozone equities and a 20% increase in credit spreads (ITRAXX Europe).
• The PIIGS five country scenario would see a 25% rise in the Euro against the dollar, a 40% drop in the Euro yield curve, a 20% drop in Euro equities and a 15% drop in US equities. In addition EU banking stocks would fall by 25% and ITRAXX Financials credit spreads would increase by 100%, which would imply downgrades and losses of up to 20% in high-grade corporate debt. This scenario also predicts losses of up to 15% for global equities with near-doubling of volatility and the VIX over 50.
• A total collapse scenario would see European equities down 40%, US and global equities down 30%, Euro yields down 75% and ITRAXX Europe and ITRAXX Financials credit spreads up 150% and 200% respectively.
• Oil would fall across the scenarios, ranging from 5% from a Greece departure through to a 50% decline from a complete breakup.
• Sterling would strengthen against the Euro by between 5-25% across the scenarios.
• Volatility would increase across all assets across the scenarios (with even a Greece exit resulting in volatility increasing by between 25% and 50% across equities).

The results seek to model the impact of each scenario over three months, looking eight weeks before and six weeks after the shock to form a balanced picture.

SunGard APT’s Head of Research Dr Laurence Wormald comments: “We want to help professional investors think logically about the potential impact of different Euro breakup scenarios on their portfolios. We’re not predicting exact timing, though clearly the next six months have a variety of known critical dates, as well as possible unknown flashpoints.

“It’s important to realise that this is not a black swan, it’s a widely discussed possible event, and while unprecedented it can’t be classed as very improbable, nor would it be rare. Since 1945, 87 countries have left currency unions.

“We’re not analysing the probability of breakup, but the likely consequences it would bring, helping investors make contingency plans. While comprehensive hedging of such scenarios is often unrealistic, investors can model scenarios and consider potential hedges on risks such as credit risk, FX risk, oil and equity risk. Of course, the resulting scenario shocks are no more than very rough estimates, but it is understanding the order of magnitude and inter-relationships that is critical for investors. For example a severe recession in the European countries would have real-economy effects, leading to enormous pressure on global equities markets, including exporters such as China and the commodities producing nations.”

“It is still seems probable that no action to change the current composition of the Eurozone is likely at the present, and the scale of the next market/political crisis would have to be large enough to be a real threat to the creditworthiness of both Germany and France before such action would be probable. But now is the time for good risk management on multi-asset class portfolios.”

SHOCK SCENARIO VALUES CHART HERE
See note below table for more explanation of the market factors included in the scenarios

 

Exit scenario shock (%)

Scenario Variable

(risk factor)

Greece

Greece and Portugal

PIIGS

Germany

Complete break-up

 

Level

Volatility

Level

Volatility

Level

Volatility

Level

Volatility

Level

Volatility

FX EUR/USD

+10

+25

+15

+25

+25

+40

+30

+60

+35

+60

FX GBP/USD

+5

+25

+10

+25

+15

+40

+20

+60

+25

+60

EUR yield (swap curve)

-5

+25

-20

+25

-40

+50

-50

+75

-75

+75

USD yield (swap curve)

-5

+25

-10

+25

-25

+50

-40

+75

-75

+75

GBP yield (swap curve)

-5

+25

-10

+25

-25

+50

-40

+75

-75

+75

EU Equities

-10

+30

-15

+40

-20

+75

-30

+100

-40

+150

US Equities

-5

+30

-10

+40

-15

+60

-25

+75

-30

+100

GB Equities

-5

+30

-10

+40

-15

+60

-25

+75

-30

+100

Leaver Equities

-25

+75

-25

+75

-30

+100

-15

+75

-40

+150

Asia-Pac Equities

-5

+25

-10

+35

-15

+40

-25

+75

-30

+100

Oil

-5

+30

-10

+40

-15

+50

-30

+75

-50

+100

EU Financials (equity)

-10

+50

-15

+50

-25

+100

-50

+125

-60

+150

US Financials

(equity)

-5

+50

-10

+50

-15

+100

-35

+125

-40

+150

GB Financials

(equity)

-10

+50

-10

+50

-25

+100

-50

+125

-60

+150

ITRAXX Europe

+15

+50

+20

+50

+50

+100

+100

+125

+150

+150

ITRAXX Financials Senior

+30

+50

+45

+50

+100

+100

+150

+125

+200

+150


Definition of Scenario Factors APT scenarios are based upon shocks to the following market risk factors
• FX factors: EUR, GBP, USD (representing changes to exchange rates between those currencies)
• Swap Curve factors: EUR, GBP, USD Shift factors (representing changes to short- and long-term interest rates in those currencies)
• Equity Market factors: US, EU, GB, Asia (representing changes to broad market indices in those equities markets – “Leaver” refers to the market of any country leaving in that scenario)
• CDS Spread factors: European ITRAXX spreads (representing changes to the price of insuring credit against default for those sections of the corporate bond markets, especially Banks)

SunGard’s APT www.sungard.com/apt/learnmore

SunGard www.sungard.com

BG

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. Opalesque Exclusive: Ex-Man manager combines sustainable investing with AI/ML[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Dr. Richard Bateson, quant fund manager and physicist, has recently

  2. Other Voices: "Winner-take-all" dynamics and hedge fund investing[more]

    A growing stream of thinking in microeconomics is the concept of "winner-take-all" dynamics. The idea seems simple. A combination of networking economics and classic economies of scale creates situations where there are just a few dominant firms or economic agents who are able to capture significant

  3. Investing - How Chipotle's comeback attracted big data robots and value investors alike[more]

    From Forbes.com: When William Ackman's ailing hedge fund Pershing Square Capital Management bet $1 billion on shares in Chipotle Mexican Grill beginning in July 2016, the stakes couldn't have been higher. Pershing Square was reeling from what would eventually be a near $4 billion loss in drugmaker V

  4. Gondor Capital sees challenges ahead for financial markets as two hedge funds post strong gains in Q1[more]

    Komfie Manalo, Opalesque Asia: Vincent Au, portfolio manager of New York-based hedge fund firm Gondor Capital Management believes that the remaining of the year would be challenging for the financial markets even as his two hedge funds maintain

  5. Service Providers - Colemore launches fee tracking service for limited partners[more]

    Following Colmore's successful launch in January 2017, the firm has announced the launch of FAIR.. FAIR is designed to help private equity investors independently validate fees and incentives charged by underlying managers, saving time and providing an extra level of comfort. There is a glob