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Market Insight - Risk Management and Macroeconomic Uncertainty

Despite healthy returns in global equity markets through most of 2012, the investment environment remains uncertain.  The daily VIX suggests that risk levels have declined, yet estimates of the equity risk premium suggest higher levels of uncertainty.  How can investors reconcile these two signals?  In this paper, we explore reasons for discrepancies between these two signals, and suggest that these reasons present challenges for both the measurement and management of risk.  We propose that many of these risk management challenges can be resolved by focusing on understanding the drivers of valuation.