MAFI: A Multi-Asset Fragility Indicator Using Principal Component Analysis

21 Pages Posted: 14 Mar 2015 Last revised: 17 Mar 2015

See all articles by Arta Babaee

Arta Babaee

Imperial College London

Eddie Cheng

Schroders Investment Management

Anthony Constantinides

Imperial College London

David King

Schroders Investment Management

Chenfei Ma

Schroders Investment Management

Pedro Rodrigues

Imperial College London

Matthias Scheiber

Schroders Investment Management

Date Written: March 13, 2015

Abstract

We introduce a risk indicator for a global multi-asset portfolio that includes equities, commodities, and bonds by using principal component analysis. This indicator is called Multi-Asset Fragility Indicator (MAFI). We give the intuitive reasoning behind MAFI and demonstrate how different types of major draw-downs that occur in different market conditions can be avoided for the multi-asset portfolios of our interest. Our proposed methodology is a straightforward statistical approach. While it does not take any fundamental views into account, its performance during different periods of turbulence for multi-asset portfolios is in line with intuition and can be justified by economic rationale.

Keywords: Market Co-Movement, PCA, Multi-Asset Investment, Market Fragility, Hedging

JEL Classification: G11, E42

Suggested Citation

Babaee, Arta and Cheng, Eddie and Constantinides, Anthony and King, David and Ma, Chenfei and Rodrigues, Pedro and Scheiber, Matthias, MAFI: A Multi-Asset Fragility Indicator Using Principal Component Analysis (March 13, 2015). Available at SSRN: https://ssrn.com/abstract=2574252 or http://dx.doi.org/10.2139/ssrn.2574252

Arta Babaee

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Eddie Cheng

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

Anthony Constantinides

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

David King

Schroders Investment Management ( email )

United States

Chenfei Ma

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

Pedro Rodrigues

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Matthias Scheiber (Contact Author)

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

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