Central Banks, Switzerland and What You Can and Can't Model About Them


By Michael McDaniel, Chief Investment Officer

I often quip “these are the days of our centrally planned lives” as my token response to news of surprise central bank monetary decisions. This is both a subtle jab at an old soap opera (I can’t imagine it’s still on air) and the tomfoolery of central banks around the globe.

This week the Swiss central bank made a surprise announcement to stop manipulating its currency against the Euro. The value of the Swiss franc soared on the news (and Swiss stocks collapsed).  

This surprise decision has seemingly impacted a number of asset classes. Contrary to historical correlations, both the US Dollar and precious metals rose in unison on the news. The US and international stock markets simply shrugged.

There are a number of methodologies in the financial industry aimed at trying to proactively account for such surprise events.

Riskalyze methodology doesn’t attempt to model the likelihood that a news event will occur. Especially when it comes to the actions of central banks, it’s exceedingly unlikely that any methodology can accurately assess the likelihood of future central bank actions. Switzerland is only one example of that.

However, we do believe in empowering advisors to incorporate the scenarios they consider to be likely or possible into the underlying risk model calculations in a portfolio. Let’s take a look at a few examples of that.

Macro Approach

Should an advisor believe that the equity markets are set to crash, he or she can input a custom market return and our technology will model how the portfolio is likely to respond to that return over the long run. In the same vein, should an advisor believe that the fixed income markets are set for a change, he or she can input a custom bond market return and our technology will model how the portfolio is likely to respond to the custom input.

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Micro Approach

Should an advisor believe that a specific investment is set to crash or soar, he or she can input a custom scenario for each individual investment inside a portfolio and Riskalyze will model the portfolio accordingly.  


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Bottom line? Riskalyze’s methodology empowers advisors to model portfolio risk in a way that respects the complexities of the world’s markets, and incorporates their own expertise into the underlying assumptions beneath the analysis.