BoA Merrill Lynch Global Research has launched a cross-market risk gauge, the Global Financial Stress Index (GFSI). The bank said back-testing illustrates that sharp rises in the index over short periods of time would have had a high degree of accuracy in forecasting sell-offs in assets, particularly global equities, commodities and US high-yield bonds. The index is not investable, however.
"Understanding diverse sources of global financial stress has become increasingly important in today's markets," said Benjamin Bowler, global head of equity derivatives at BoA Merrill Lynch Global Research. "Knowing which risks are important and, more importantly, how to hedge them without overpaying is key to successful investing."
The GFSI's sub-components illustrate the differences in market, solvency, liquidity, and tail risk that are priced daily into financial markets. BoA Merrill Lynch said these factors can help uncover relative value opportunities across assets and their derivatives, as well as allow investors to identify the cheapest tail hedges.
The GFSI composite index combines over twenty measures of stress across five asset classes and various geographies. It measures cross-asset measures of volatility, solvency and liquidity; hedging demand, implied by equity and currency options skew, and; investor appetite for risk, as measured by trading volumes, as well as flows in and out of equities, high-yield bonds and money markets.