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Wednesday, July 1st, 2015

The deterioration of the Greek crisis has no material impact on the risk of UK equity, yet. posted by Dr Andrew Lilico & Dr Stefano Ficco

Figure 1:  Rolling Asset Betas (2-years of daily data)

EE calculations based on Bloomberg data.


The “beta” of an asset tells us how the riskiness of that asset changes relative to the sum of all assets in the economy. The beta of all assets is by definition equal to 1. Periods of market turbulence are often characterised by “flight to safety” effects which are associated with a decrease of asset betas in sectors perceived to be safer (e.g. utilities), and an increase in the betas of relatively riskier assets (e.g. financials). The reverse (i.e. utility betas rising and financial betas decreasing) is often observed when investors’ risk appetite increases.

Despite the increase in market volatility over the last month and the higher perceived chance of a “Grexit”, recent movements in two-year rolling sectoral betas do not suggest any material “flight to safety” effect yet. Indeed quite the reverse. The betas of UK utilities and UK financials assets maintain, respectively, the positive and negative trajectories they have had for some time, implying if anything a continued reversal of the flights-to-safety of 2008-2012. It is possible, however, that if there had been some very recent flight to safety it would not yet be showing up in these data.

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