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Crisis Risk Management and Asset Allocation

Crisis Risk Management and Asset Allocation. Is there a reasonable and effective trading strategy for crisis situations?. February 28, 2002. Brad Corbett Geoffrey Hardin Tommy Jacobs Robert McWilliam. Agenda. Hypothesis Methodology Analysis Conclusion. Hypothesis.

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Crisis Risk Management and Asset Allocation

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  1. Crisis Risk Management and Asset Allocation Is there a reasonable and effective trading strategy for crisis situations? February 28, 2002 Brad Corbett Geoffrey Hardin Tommy Jacobs Robert McWilliam

  2. Agenda • Hypothesis • Methodology • Analysis • Conclusion Crisis Risk Management and Asset Allocation

  3. Hypothesis • Markets have reacted in a similar manner to various political events in recent history. • Potential for increased returns exists. Crisis Risk Management and Asset Allocation

  4. Methodology • Define “Political Shock” • Brainstorm events • Research • Categorize events • Choose asset classes • Obtain data / refine list • Mine data! Crisis Risk Management and Asset Allocation

  5. What is a Political Shock? A significant event occurring somewhere in the world that is both unanticipated and has unforeseeable future consequences. Crisis Risk Management and Asset Allocation

  6. Events • JFK assassination • Six Day War • Kent State shooting • Three Mile Island • Iranian hostage crisis • Iraq invades Iran • Grenada • Chernobyl • Iraq attacks “USS Stark” • Panama invasion • Invasion of Kuwait • Oklahoma City bombing • US Embassies in Africa bombed • Oklahoma City bombing • WTC tragedy We started with approximately 30 events spanning the past century. Crisis Risk Management and Asset Allocation

  7. Categorize “Shocks” • Perspective of U.S. asset manager • Economic shocks excluded (e.g. oil embargo, Russian default) • Positive shocks excluded (e.g. Fall of Berlin Wall) • Classification limited to 2 categories based on scale and scope: • 1 – Complete surprise, huge potential impact, global implications • 2 – Surprise, smaller potential impact, local/regional implications Crisis Risk Management and Asset Allocation

  8. Obtain Data / Refine List • Asset selection (Dow, Baa Corp, UST10, Gold) • Diversity • Data availability • Data organization • Availability (i.e. 1962 – present) • Coarsening (i.e. daily, weekly) • Data analysis • “Trough” identification (i.e. buying opportunity) Crisis Risk Management and Asset Allocation

  9. Analysis Results Crisis Risk Management and Asset Allocation

  10. Concluding Remarks • Numbers dictate the trading strategy • Week 1: Buy gold, hold bonds, sell stocks • Week 2: Buy stocks, hold gold & bonds • More factors at play… • Ethics • Reputation Crisis Risk Management and Asset Allocation

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