20180531-NATIXIS-What_is_the_best_risk_aversion_indicator_in_financial_markets__4页_713kb

Flash Economics Summary

Core Content

This document explores the effectiveness of three risk aversion indicators in explaining long-term interest rates on government bonds in the United States and Germany. The indicators analyzed are:

• Natixis risk perception index: A measure of risk aversion based on volatility levels and bid-ask spreads.
• VIX (volatility of equity options): A second-order moment of the distribution of equity returns.
• SKEW: A third-order moment of the distribution of equity returns, indicating the asymmetry and the risk of a serious crisis.

The study focuses on the ability of these indicators to explain 10-year interest rates, using a combination of 2-year interest rates, inflation swaps, and monetary base data as explanatory variables.

Main Findings

1. Correlation Analysis

• The correlation between the Natixis risk perception index and the VIX is 0.61, indicating a moderate positive relationship.
• The correlation between the Natixis risk perception index and the SKEW is -0.15, showing a weak negative relationship.
• The correlation between the VIX and the SKEW is -0.34, suggesting a moderate negative relationship.

These correlations are relatively weak, especially between the Natixis index and the SKEW, indicating that they may not capture the same aspects of risk aversion.

2. Explanation of Long-Term Interest Rates

United States

The best estimate for the 10-year interest rate is:

$$
10\text{-year interest rate} = 3.85 + 0.36 \times 2\text{-year interest rate} + 0.07 \times \text{Inflation swap}
$$
$$

• 0.00013 \times \text{Global monetary base} - 0.0023 \times \text{Natixis risk perception index}
  $$

• R² = 0.88, indicating a strong explanatory power.

• The Natixis risk perception index has a significant negative coefficient, suggesting that higher risk aversion leads to lower interest rates.

Germany

The best estimate for the 10-year interest rate is:

$$
10\text{-year interest rate} = 1.00 + 0.33 \times 2\text{-year interest rate} + 1.15 \times \text{Inflation swap}
$$
$$

• 0.000127 \times \text{Euro-zone monetary base} - 0.00008 \times \text{Global monetary base}
  $$
  $$

• 0.00038 \times \text{Natixis risk perception index}
  $$

• R² = 0.97, indicating a very strong explanatory power.

• The Natixis risk perception index again has a significant negative coefficient, reinforcing its role in influencing long-term interest rates.

Key Takeaways

• The Natixis risk perception index is the most effective in explaining long-term interest rates in both the U.S. and Germany.
• The VIX and SKEW are less effective, with weaker correlations and lower explanatory power.
• The Natixis index reflects investor risk perception through a technical risk measure, making it a more comprehensive indicator.
• The study highlights the importance of risk aversion in shaping long-term interest rates and suggests that it should be captured through a broader measure than just volatility or skewness.

Conclusion

The analysis concludes that risk aversion in financial markets is best represented by the Natixis risk perception index, as it provides the most accurate and consistent explanation of long-term interest rates. This suggests that while volatility and skewness are important, they do not fully capture the nuances of investor behavior and market sentiment in the context of interest rate determination.

Disclaimer Summary

• The document is intended for professional and qualified investors only.
• It is strictly confidential and cannot be disclosed to third parties without consent.
• It is not a personalized investment recommendation and does not take into account individual financial situations.
• No liability is accepted for the accuracy or completeness of the information.
• The information is based on public data and may not reflect the views of Natixis or its affiliates.
• The document is subject to regulatory restrictions in various jurisdictions and must be distributed accordingly.