RiXtrema Research Note on Alpha Now, a Thomson Reuters Publication
CHOOSING FUNDS IN THE YELLEN ERA,
USING INFLATION SCENARIOS
If Janet Yellen is confirmed to lead the Fed, risk managers and strategists will have to consider the possibility of inflation. Her "optimal control" models place greater emphasis on unemployment and less emphasis on controlling inflation.
Inflation, once started, can be very difficult to control. It can come in two varieties: an inflationary boom, which is more or less desired by the Fed, or the much less-attractive stagflationary environment.
In this special report, we will identify mutual fund investments that are likely to perform well in these two inflationary scenarios. We will also build in these additional criteria - a high yield and low expense ratio.
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RiXtrema Research Note
CORRELATION STRESS TESTING PUZZLE
Abstract: Risk managers are frequently tasked with modeling macroeconomic scenarios and their effects on various portfolios. Macroeconomic scenarios require multiple (composite) shocks to different factors. This creates the potential for implausible shocks and counterintuitive results. In this research note, we will examine a case of a composite shock to both VIX and EUR that produces counterintuitive results and explain the reasons for the problem. We will finally see how RiXtrema’s unique Shock Plausibility measure can help users of Riskostat in avoiding this problem. Shock Plausibility shows the joint probability of all shocks, as the user is creating scenarios. It helps in design of plausible stress tests and in effectively communicating the results both within the organization and to investors.
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