20180312-法国巴黎银行-EM+Latam_STRATEGY__Risk_premium_model__From_risk_taking_to_neutrality_9页_530kb

EM+Latam Strategy Summary

Core Content

This document outlines the analysis and insights from BNP Paribas regarding the global risk premium model (<BNPSGRP Index> on Bloomberg) and its implications for market behavior, particularly in the context of the S&P 500 and Latin American markets. The report focuses on the interplay between risk appetite and market risk, emphasizing the importance of understanding both concepts to make informed investment decisions.

Main Points and Key Information

1. Risk Premium Model Overview

• The model assesses the probability of market correction and subsequent rally based on changes in risk premium levels.
• The model is used to determine the risk-off/risk-on signals for the global market.
• The index has shown key shifts in January, February, and March 2018, indicating changes in market sentiment.

2. Key Dates and Signals

• 16 January 2018: The index was at very low levels, suggesting high risk-off sentiment and a high probability of market correction.
• 9 February 2018: The model shifted to risk-on, indicating a bullish signal and a subsequent rally in the S&P 500 (+7.9%).
• 2 March 2018: The model transitioned from caution to supportive levels, reflecting a shift in risk appetite.
• 12 March 2018: The model returned to neutrality, meaning there is no abnormal divergence between risk and return in the market portfolio. This suggests that systemic overweight strategies should be scaled back.

3. Risk Appetite vs. General Risk

• The report distinguishes between shifts in general risk and changes in risk appetite.
• Risk appetite is measured through abnormally high or low risk premiums, which reflect investor behavior rather than just market fundamentals.
• The expected return on an asset is modeled as:
  $$
  \text{Expected Return (Y)} = \alpha + \theta (\sigma^2)
  $$
  Where:
  • $\alpha$ is the systemic or global risk.
  • $\theta$ is the level of risk appetite.
  • $\sigma^2$ is the variance of the asset.
  • An increase in $\theta$ indicates higher risk aversion.

4. Methodology

• The model uses Spearman rank correlation to measure the relationship between asset risk ($\sigma^2$) and excess returns.
• This is done by calculating the rolling 1-month excess return of 23 global assets and comparing it with ex ante risk levels.
• Spearman correlation is preferred over Pearson because it is resilient to non-linear relationships and extreme values.

5. Strategic Implications

• When the model is in neutrality, it implies that the market is balanced and that overweight strategies should be reduced.
• The model is global in nature, and while it correlates with the S&P 500, it may not reflect the behavior of other assets consistently.

Annex: Inferring Risk Appetite

• Risk is not the same as risk appetite. Risk can be high while appetite is low, or vice versa.
• The model is based on the correlation between risk and return, with a focus on abnormal risk premiums.
• The model is non-independent research and is intended for Professional Clients and Eligible Counterparties.
• It is not investment advice and should not be relied upon for investment decisions.

Legal and Regulatory Disclosures

• This document is a marketing communication and not investment research.
• It may contain performance data based on back-testing, which is for illustrative purposes only.
• No guarantee is made regarding the accuracy or completeness of the information.
• Conflicts of interest may exist due to BNPP's involvement in investment banking, underwriting, and advisory services.
• Options and ETFs discussed may involve high risk, and the document does not constitute a prospectus or public offering.
• The document is intended for BNPP's clients and not for public distribution.

Conclusion

The report provides a framework for assessing risk appetite using the global risk premium model, highlighting the importance of differentiating between general risk and risk appetite. It outlines the historical behavior of the model and its strategic implications, particularly in relation to market corrections and rallies. The analysis is non-independent, and the document serves as a discussion tool, not as investment advice.