Crisis Risk Management and Asset Allocation

1
Crisis Risk Management and Asset Allocation
Is there a reasonable and effective trading
strategy for crisis situations?
February 28, 2002

• Brad Corbett
• Geoffrey Hardin
• Tommy Jacobs
• Robert McWilliam

2
Agenda

• Hypothesis
• Methodology
• Analysis
• Conclusion

3
Hypothesis

• Markets have reacted in a similar manner to
  various political events in recent history.
• Potential for increased returns exists.

4
Methodology

• Define Political Shock
• Brainstorm events
• Research
• Categorize events
• Choose asset classes
• Obtain data / refine list
• Mine data!

5
What is a Political Shock?
A significant event occurring somewhere in the
world that is both unanticipated and has
unforeseeable future consequences.
6
Events

• Iraq attacks USS Stark
• Panama invasion
• Invasion of Kuwait
• Oklahoma City bombing
• US Embassies in Africa bombed
• Oklahoma City bombing
• WTC tragedy

• JFK assassination
• Six Day War
• Kent State shooting
• Three Mile Island
• Iranian hostage crisis
• Iraq invades Iran
• Grenada
• Chernobyl

We started with approximately 30 events spanning
the past century.
7
Categorize Shocks

• Perspective of U.S. asset manager
• Economic shocks excluded (e.g. oil embargo,
  Russian default)
• Positive shocks excluded (e.g. Fall of Berlin
  Wall)
• Classification limited to 2 categories based on
  scale and scope
• 1 Complete surprise, huge potential impact,
  global implications
• 2 Surprise, smaller potential impact,
  local/regional implications

8
Obtain Data / Refine List

• Asset selection (Dow, Baa Corp, UST10, Gold)
• Diversity
• Data availability
• Data organization
• Availability (i.e. 1962 present)
• Coarsening (i.e. daily, weekly)
• Data analysis
• Trough identification (i.e. buying opportunity)

9
Analysis Results
10
Concluding Remarks

• Numbers dictate the trading strategy
• Week 1 Buy gold, hold bonds, sell stocks
• Week 2 Buy stocks, hold gold bonds
• More factors at play
• Ethics
• Reputation