Conference Notebook (Day Two)
| Feb 13th, 2007 | Filed under: Alternative Beta & Hedge Fund Replication | By: Alpha Male |
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Global Risk Appetite: The mother of all betas?
One rainy day in 1997, Jonathan Wilmot, Chief Global Strategist at Credit Suisse became frustrated with using simple equity risk premiums as a proxy for global risk appetite. He wondered if he could better measure our inherent appetite for risk. Out of this experience was born the Credit Suisse Global Risk Appetite Index.
It turns out that global risk appetite is a pretty good leading indicator of global growth. In addition, Wilmot found that moments of global euphoria and global panic made intuitive sense (which is apparently more than one can expect from other more traditional proxies of risk aversion). Interestingly, the lowest-ever level of global risk appetite (panic) and the second-highest-ever level of global risk appetite (euphoria) have both occurred in the past 5 years. In other words, we seem to have all developed a serious bipolar disorder.
Wilmot also observed that panics lasted for shorter periods of time than euphorias and that they tended to be sharper and more extreme. Also, euphorias and panics occur in regular sine waves at a frequency of about 41 months (very similar to the cycle in global industrial production). He presented a chart that shows we are currently at the top of one such wave. And if previous patterns hold, we observe that global risk appetite should be about to fall off a cliff (although Wilmot is very clear that he is not making this prediction).
Yikes. We’re glad conference Co-Chairman David Hsieh started off the day by pointing out the fire exits.
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