State Street Launches New Index to Help Investors Manage Potential Market Risk in Portfolios

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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