The Biggest VaR Shock Since Lehman & The Risk Parity Panic

After the closing bell sounded on another "worst since 1987" session for US equities, I quoted Nomura's Charlie McElligott describing the current state of affairs. "We continue to exist in a rolling 'VaR-down'/'de-grossing into cash' state, which means further knock-on deterioration in market depth and liquidity from MM’s as well, going hand-in-hand with gappier price action as bid-ask dramatically widens on much smaller size", Charlie wrote, in his Monday missive. This has been the regime f

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10 thoughts on “The Biggest VaR Shock Since Lehman & The Risk Parity Panic

  1. So, if the CTAs, vol.-targeting, and risk parity have all pulled back, what’s left? It seems like all of the mechanical deleveraging has flushed itself from the system. If that’s the case it seems like the situation should stabilize itself, unless the discretionary/fundamentals crowd decides to self-destructively hit the panic button and sell everything.

    1. Interesting comment. Perhaps H could provide some insight into what the discretionary/fundamentals crowd looks at to decide what to do. Investing sure is complicated these days!

    2. Anonymous Coward, consensus view seems to be technical bounce to 2850-ish over next few weeks, making said discretionary crowd feel pretty relieved that they survived the storm … but then relevant Econ data and downward EPS revisions start rolling in, providing clear evidence of the fundamental damage, which scares the discretionary crowd, and the second wave of selling commences, taking out the first wave lows. 2200, 2000, 1,800 come into play.

      “We’ll see what happens.”

  2. I expect a reflex bounce tomorrow morning, there was likely forced margin selling late today. That could last the day or an 1 hour. No confidence but should happen.

  3. Also there is a large bank run going on- cp, bank lines, etc. The clients all want cash. The Fed not only needs to buy assets but to dump a ton of liquidity into the banking system- like with a fire hose- as long as necessary to provide a fire break. This is starting to resemble the GFC.

  4. These VaR shocks are catastrophic after a decade during which suppressed cross-asset volatility allowed for ever more leverage to be deployed across various asset classes.”

    Which is why you can’t close any one market. But despite all the turmoil in the S&P since Friday, the action on the S&P between 3550 and 3400 looks like a short term bottom. Given Options expiration this Friday, we could see a big move up by then. Still it’s likely a sell the news event. Unless the Fed’s repo magic starts having the effect it did last fall, I see the markets rolling over again.

    All I hear is one great big global deflationary/disinflationary hiss.

NEWSROOM crewneck & prints