Showing posts with label Market risk. Show all posts
Showing posts with label Market risk. Show all posts

Thursday, September 13, 2018

13/9/18: Concentration Risk: IPOs, New Firms Arrivals & Super Stars


One of my favourite long-run tail risks to watch in the financial markets (and indeed, due to ongoing monopolisation trends, in the entire economy) is concentration risk. Here is an absolutely epic post from @michaelbatnick on the subject of increasing concentration in equity markets driven by the growing trend toward keeping new tech mega starts private: http://theirrelevantinvestor.com/2018/09/10/making-private-public/

Aside from compiling a treasure trove of data, the post brings to light some interesting observations, not necessarily central to the author's core arguments.

Take, for example, this chart:


The post correctly views this as evidence that both volumes and numbers of IPOs have been relatively steady over the recent years. Albeit, both are running woefully below the pre-dot.com bust era averages. And, as other evidence presented shows, this is not the feature of the dot.com bubble build up phase: in fact, numbers of IPOs have been running well below the 1980-2000 average since the dot.com bust.

Maturity to IPO duration is also longer:

Which, of course, supports higher median IPO size in the chart above. Controlling for this, the collapse in IPOs activity in 2001-2018 period is probably much more dramatic, than the first chart above indicates. Or, put differently, IPOs are now more concentrated in the space of older, and hence more able to raise funds, companies. That is a phenomenon consistent with concentration risk rising.

It is also a phenomenon consistent with the hypothesis that entrepreneurialism is declining in the U.S. as younger, more entrepreneurial ventures are clearly less capable of accessing public equity markets today than in pre-2001 period.

There is a lot, really a lot, more worth reading in the post. But here are two more charts, speaking directly to the issue of concentration risk:

 and

Yes, the markets are dominated by a handful of stocks when it comes to providing returns. Namely, Facebook and Alibaba account for a whooping 85% of the total market cap gains since 2012. $85 of each $100 in market cap increases went to just these two companies.

This is concentration risk at work. Even tightly thematic investment strategies, e.g. ESG risk hedging investments, cannot avoid crowding into a handful of shares. Any tech sector blowout is going to be systemic, folks.

Friday, November 24, 2017

Friday, September 9, 2011

09/09/2011: VIX - another blow out

EU debt disaster and US own woes or just EU debt disaster, who knows, but VIX - that indicator of overall risk perceptions in the markets - is again above the psychologically important 40 mark.

Charts to illustrate:
Vix has gone to close at 40.50 today having opened at 35.53 and hitting the high of 40.74. In terms of historical comparatives:
  • Intra-day high achieved today was 170th highest point reached by VIX since Jan 1, 1990, 147th highest reading since Jan 1, 2008 and 15th highest since Jan 1, 2010
  • VIX closing level was 156th highest in history since Jan 1, 1990, 129th highest since Jan 1, 2008 and 8th highest since Jan 1, 2010. The latter being pretty impactful
Intra-day spread was pretty high, but not too remarkable, ranking as 179th highest since Jan 1, 1990, 102nd highest since Jan 1, 2008 and 49th highest since Jan 1, 2010, suggesting possible structural nature of elevated readings in VIX overall.
3 mo dynamic standard deviation of VIX index reached 8.981 - the highest level of volatility in VIX since January 1, 2010 and 90th highest since both Jan 1, 2008 and Jan 1, 1990. We are now clocking the highest level of VIX volatility (on 3mo dynamic basis) since February 2009.

Looking at semi-variance:
1mo dynamic semi-variance for VIX is now running at 15.73 - not dramatic, but showing persistently elevated trend since August 5, 2011. Today's reading was, nonetheless, only 27th highest since Jan 1, 2010. To flag that - below is the snapshot of short series range:Yep, folks, with VIX stuck at elevated levels with occasional blowouts like today, with European banks beefing up their deposits with ECB and Bank of Japan, with investors throwing money at Uncle Sam and Bundesbank (at negative interest rates) and demand for CHF undeterred by the threats of continued devaluations, what we are seeing is fundamentals-driven run for safety. Nothing irrational here, unless feeling sh***less scared is irrational...