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

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