Modeling The Volatility Of Equities Markets In 2008
The volatility of most equities markets increased very sharply during 2008, especially since the beginning of September 2008. In this whitepaper we consider how SunGard APT's risk models performed since the beginning of 2008, focusing on the concepts of responsiveness and robustness.
The analysis is based on model forecasts at several different dates during the year, for both Short Term Volatility (STV) and Medium Term Volatility (MTV) models. Specific examples for the UK and US markets are considered, with the aim of providing users of APT’s models a richer interpretive framework when reporting portfolio risk. The results presented here represent a sample of the continuously-generated model test outcomes which are part of the research and development process within APT.
We demonstrate the extent to which APT models have responded to market changes during 2008, with all risk forecasts increasing markedly. In particular, we show how the STV models have evolved and have been forecasting increases in short-term tracking deviation and volatility since the beginning of the year. As systematic risk has increased greatly for almost all portfolios, we illustrate how APT’s Tracking at Risk (TaR) measure has been an effective forecast of short-term tracking deviation even during the extreme events of Q3 2008.
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