EXECUTIVE SUMMARY
- Measuring dependence between tail outcomes in risky-asset markets is essential for risk management and portfolio diversification.
- Pairwise co-variance between daily, weekly and monthly returns, the most commonly used co-movement metrics, fail to cope with the stylized facts that characterize financial markets (fat-tailed distribution of periodic returns, non-linear dependence, volatility of volatility (volatility clusters), parabolic path followed by periodic returns in the late stage of a bubble).
- To address such shortcomings, we build a multi-asset co-movement indicator based on moments of order higher than 2 and trend returns of 40 asset classes.
- This proprietary indicator tends to peak and then fall precipitously when the MSCI World reaches a long-standing high-water mark.
- It shows that the ascent to the late 2021 peak in the MSCI World has been very narrowly led by US equities (by descending order: NASDAQ 100, NASDAQ, S&P homebuilders index, NASDAQ biotech, S&P 500). Having led markets up, these are the key sectors to watch as the markets have been looking for direction since the beginning of 2022.
