Election Follow-up: Probability-Weighting Forecasts

The result of the United States presidential election last week delivered more than just a surprising new Commander in Chief–the markets surprised, too. Initial reactions to the news that Donald Trump was the likely winner at approximately 1:00 EST shocked markets and crushed risk appetite – much as many had expected. Risk was immediately dumped in favor of the usual havens, including gold and CHF, and equity vol jumped more than 20 percent in the early hours. But, as time wore on, prices settled and liquidity improved. As the opening bell rang Friday morning, we were witness to far-reaching reversals as stocks pared losses and pushed on to making strong gains by the end of the day.

Below I illustrate the extent to which markets moved from initial reactions to twelve hours following:

Forecast
Probability (approx.) 0.8 0.2
Asset Class Clinton Wins Trump Wins
USDCHF 2% -4%
US Bond Prices -1% 2%
US Equities 1% -3%
Gold -1% 5%
Volatility -5% 20%
Initial Reaction Change on close (01.00 ET) Forecast
USDCHF -2.0% -4%
US Bond Prices 0.4% 2%
US Equities -3.7% -3%
Gold 3.9% 5%
Volatility 19.0% 20%
12hrs Later Change on prev. close (13.00 ET) 12hr Change (% Points)
USDCHF 0.5% 2.5%
US Bond Prices -2.3% -2.7%
US Equities 1.0% 4.7%
Gold 0.1% -3.8%
Volatility -2.2% -21.2%

The above table captures the potential nature of event risk outcomes–limit down one moment to unch and then higher within hours. What is crucial to note here is the biggest movement of capital happened sometime after information was known, not as it was known, like many are more familiar.

Below is an example of how clients can assign probabilities to forecasts, which in turn allows for an overall estimated expectation of event outcomes:

 

Aggregated by Strategy

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Strategy drill-down

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Being fortunate to predict an initial reaction matters if exposure to prices stops there–the reality can be markedly different.
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About the Author
David White worked as an equity trader and portfolio manager in derivatives for more than five years before joining Imagine’s London office as a Consultant in 2015. David’s roles are to advise and offer consulting services for systematic applications of risk management and derivatives pricing. David leads and is the project manager for EMEA client implementations. David holds a bachelor’s degree from Bournemouth University. He can be reached by email and phone: +44 (0) 7440 0743.

Trump vs Clinton: Election Scenario Analysis

Months after the UK’s vote to leave the EU (Brexit), prices in risk assets are still swaying from one Article 50 headline to the next. In the US, November 8 presents a similar risk management challenge to market participants because of the outcome of the long-awaited and heavily-contested US Presidential Election.

Not unlike Brexit, the market has once again predicted one outcome as more likely than the alternative, the question of how markets might react, and the subsequent resulting price changes if the unlikely prevails. Below, we present an example of estimates, as we did for Brexit, for either outcome of the vote:

Probability (approx.) 0.8 0.2
Asset Class Clinton Wins Trump Wins
USDCHF 2% -4%
US Bond Prices -1% 2%
US Equities 1% -3%
Gold -1% 5%
Volatility -5% 20%

Please contact Consulting or your Imagine representative for help with constructing your own scenario analysis.
Disclaimer

The stresses described in this blog post illustrate one possible scenario and are intended to be used in general as guidance towards risk management of market events.

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About the Author
David White worked as an equity trader and portfolio manager in derivatives for more than five years before joining Imagine’s London office as a Consultant in 2015. David’s roles are to advise and offer consulting services for systematic applications of risk management and derivatives pricing. David leads and is the project manager for EMEA client implementations. David holds a bachelor’s degree from Bournemouth University. He can be reached by email and phone: +44 (0) 7440 0743.