Event risk provided some abrupt market turnarounds in 2016, emanating from political processes such as the Brexit referendum and US elections. This year is shaping up with the potential for even more turbulence from event risk – and not just from politics, but possibly from changing patterns in economic data and even the weather.
Characterising event risk
We like to categorise event risk into three distinct types. First, there are “binary dates,” such as elections, with near-certain potential for a divergent outcome. Second, there are “information dates,” which are typically data releases, and which have the ability to surprise with an unexpectedly extreme data point. Finally, we have “surprise!”, where neither the date nor the event/outcome is anticipated. Surprises can come from political statements, military actions, or natural disasters, as a few examples.
Here, we look at each category and provide some commentary around potential dates to watch in 2017. Then, we will explore a few different approaches to managing event risk, highlighting sophisticated options.