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Crisis Risk Management and Asset Allocation: Effective Trading Strategies for Crisis Situations

Explore a research paper discussing the hypothesis, methodology, analysis, and conclusions of trading strategies during political shocks and crises, with events like JFK assassination and WTC tragedy analyzed. Discover the methodology, event categorization, data refinement, and actionable conclusions.

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Crisis Risk Management and Asset Allocation: Effective Trading Strategies for Crisis Situations

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  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 Crisis Risk Management and Asset Allocation

  3. Hypothesis • Markets have reacted in a similar manner to various political events in recent history. • Potential for increased returns exists. Crisis Risk Management and Asset Allocation

  4. Methodology • Define “Political Shock” • Brainstorm events • Research • Categorize events • Choose asset classes • Obtain data / refine list • Mine data! Crisis Risk Management and Asset Allocation

  5. What is a Political Shock? A significant event occurring somewhere in the world that is both unanticipated and has unforeseeable future consequences. Crisis Risk Management and Asset Allocation

  6. Events • JFK assassination • Six Day War • Kent State shooting • Three Mile Island • Iranian hostage crisis • Iraq invades Iran • Grenada • Chernobyl • Iraq attacks “USS Stark” • Panama invasion • Invasion of Kuwait • Oklahoma City bombing • US Embassies in Africa bombed • Oklahoma City bombing • WTC tragedy We started with approximately 30 events spanning the past century. Crisis Risk Management and Asset Allocation

  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 Crisis Risk Management and Asset Allocation

  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) Crisis Risk Management and Asset Allocation

  9. Analysis Results Crisis Risk Management and Asset Allocation

  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 Crisis Risk Management and Asset Allocation

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