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A new financial stress indicator: properties and conditional asset price behavior

41 Pages Posted: 28 Aug 2013 Last revised: 13 May 2014

Benoît Guilleminot

SMILE Investment Solutions

Jean-Jacques Ohana

Riskelia

Steve Ohana

ESCP Europe

Date Written: January 24, 2014

Abstract

The main goal of this paper is to introduce a new financial stress indicator, signaling regime transitions from stability to turbulence. This indicator is based on the combination of a wide range of market prices of risk, properly normalized to make them comparable across markets and time periods. After describing the construction and basic properties of the indicator, we discuss the conditional behavior of a basket of liquid assets. When the risk aversion signal breaches certain thresholds, risky assets dramatically correlate and their risk rewards deteriorate. Sharpe ratios decrease and drawdowns increase. Also, at the onset of chaotic phases, standard risk metrics fail to give an adequate representation of potential losses. These findings have significant implications for asset allocation and risk management purposes.

Keywords: Financial stress indicators, risk premiums, tactical asset allocation, risk measures, systemic risk

JEL Classification: G11, G28, C58, G01

Suggested Citation

Guilleminot, Benoît and Ohana, Jean-Jacques and Ohana, Steve, A new financial stress indicator: properties and conditional asset price behavior (January 24, 2014). Available at SSRN: https://ssrn.com/abstract=2317321 or http://dx.doi.org/10.2139/ssrn.2317321

Benoît Guilleminot

SMILE Investment Solutions ( email )

91, Rue du Faubourg Saint Honoré
Paris, 75008
France

Jean-Jacques Ohana

Riskelia ( email )

5 avenue de Messine
Paris, 75008
France

Steve Ohana (Contact Author)

ESCP Europe ( email )

79 Avenue de la Republique
Paris, 75011
France

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