The Systematic Risk of Global Asset Returns in Times of Crisis: (How) is COVID-19 Different?

69 Pages Posted: 6 Jun 2022 Last revised: 20 Jun 2022

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Yukun Liu

University of Rochester - Simon Business School

Tobias J. Moskowitz

AQR Capital; Yale University, Yale SOM; National Bureau of Economic Research (NBER)

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Date Written: June 4, 2021

Abstract

Using high-frequency data, we estimate and characterize the evolution of the factor structure of global asset returns across aggregate equity, fixed income and exchange rates over the period 2007-2020. We show how the factor structure of asset returns evolves through time, providing clear identification of the first two principal components (PC). Of some interest, we show these PC factor returns are subject to sudden and temporary changes in their structure, linking these changes to well-known crises (e.g., COVID-19 pandemic, Global Financial Crisis, and Brexit). These crisis periods have common features. Because of the exogenous nature of the COVID-19 shocks, we identify the drivers of the changing PC structure using news/shocks about the virus and epidemiological model forecast errors. We then investigate the implications of these findings for popular asset portfolios, with a particular focus on the volatility of these portfolios and their systematic risk exposure. Interestingly, the ability to diversify country asset-specific risk and hedge systematic risk is greatly reduced during the peak of crisis periods.

Suggested Citation

Boudoukh, Jacob and Liu, Yukun and Moskowitz, Tobias J. and Moskowitz, Tobias J. and Richardson, Matthew P., The Systematic Risk of Global Asset Returns in Times of Crisis: (How) is COVID-19 Different? (June 4, 2021). Available at SSRN: https://ssrn.com/abstract=4128178 or http://dx.doi.org/10.2139/ssrn.4128178

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Yukun Liu (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Tobias J. Moskowitz

AQR Capital ( email )

Greenwich, CT
United States

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

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Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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