State Street Launches New Index to Help Investors Manage Potential Market Risk in Portfolios
October 14 2010 - 9:00AM
Business Wire
State Street Global Markets, the investment research and trading
arm of State Street Corporation (NYSE:STT), today announced the
launch of its Systemic Risk Index, an index that measures the US
equity market’s vulnerability to market shocks. The Systemic Risk
Index describes the degree to which a small number of macro risk
factors, as opposed to stock- or industry-specific news, can drive
stock returns.
The components of State Street’s Systemic Risk Index, covering
the US equity market, are made up of approximately 60 industrial
sectors. The Index provides a single, daily measure of fragility
and can help portfolio managers to determine when they should
consider hedging their portfolios or change investment strategies.
The Systemic Risk Index can be used in conjunction with State
Street’s Turbulence Indices, because it can provide an early signal
of the onset of ‘unusualness’ in the marketplace. “Unusualness” is
defined as the covariance-adjusted distance between that day’s
observation, which is comprised of a set of contemporaneous
returns, and the multivariate mean in multi-dimensional space.
Turbulence is defined using this multivariate distance to quantify
unusual patterns of investment returns.
The Systemic Risk Index captures the extent to which markets are
unified or tightly coupled. A tightly coupled market is driven by a
relatively small number of macro risk factors and can be highly
sensitive to negative news, such as economic announcements or new
regulations. When markets are tightly coupled, they are more
fragile because negative shocks spread more quickly and broadly.
Conversely, when markets are loosely linked and less fragile, these
negative shocks may be isolated to specific industries or
sectors.
“In today’s market, investors are continually looking for new
ways to manage risk in their portfolios,” said Will Kinlaw,
managing director and head of Portfolio and Risk Management
Research at State Street Global Markets. “State Street’s Systemic
Risk Index is designed to provide institutional investors with an
early indication of fragility within the US market so that they can
adjust their strategies accordingly and maximize returns even in a
difficult market environment.”
The Systemic Risk Index was developed by State Street Associates
in collaboration with Windham Capital Management, LLC, a
Boston-based investment management boutique. “Shifts in this index
have coincided with many global financial crises, making it a very
valuable tool for varying equity exposure in the US market,” said
Mark Kritzman, a senior partner at State Street Associates and
president and CEO of Windham Capital Management.
State Street Global Markets’ research team of leading academic
and industry experts is committed to continually advancing the
science, including theory and application of its proprietary
investor behavior research and innovative portfolio and risk
management technologies, all designed to help its customers
challenge conventional thinking, shape ideas, make more informed
investment decisions and deliver measurable results.
About State Street
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors
including investment servicing, investment management and
investment research and trading. With $19 trillion in assets under
custody and administration and $1.8 trillion in assets under
management at June 30, 2010, State Street operates in 25 countries
and more than 100 geographic markets worldwide. For more
information, visit State Street’s web site at
www.statestreet.com.
About State Street Global Markets
State Street Global Markets provides specialized research,
trading, securities lending and innovative portfolio strategies to
owners and managers of institutional assets. Its goal is to enhance
and preserve portfolio values through original flow-based research,
proprietary portfolio and risk management technologies, trading
optimization and global connectivity. Its unique position at the
crossroads of the global markets enables its sales and trading
professionals to tap diverse sources of liquidity and provide
cost-effective solutions.
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