The Impact of Extreme Events

In our latest research article we analyse the impact of volatility shocks in the financial markets. We move away from traditional methods to analysing volatility and use a technique originally deployed to model the impact of earthquakes and subsequent aftershocks.

Exploring equity, fixed income and FX markets provides interesting insights into how long shocks typically persist in each asset class, and what the probabilities are of subsequent shocks. For example, in equity markets we find that following a volatility shock there is a significant probability of a further shock over the ensuing 8 days. In fixed income, this lasting impact period is much longer, lingering for 45 days on average, but with a lower probability of subsequent shocks. The research has a number of potential applications, for example, as risk management signals, or potentially as predictors of changing liquidity conditions.

Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper.