The nature of event risk is changing and in very important ways for risk managers to appreciate. We have transitioned through two distinct phases of event risk and have now entered a new and different phase. The first phase, 2010-2015, was the “central bank put” where Federal Reserve (Fed) asset purchases cushioned the impact of any negative events. The second phase from 2016 to 2017 focused on political events with known dates and unknown binary outcomes – think Brexit, US Presidential elections and UK “snap” Parliamentary election.
We have now entered a new phase, which is all about extended policy debates where the date of the final resolution is unknown but there is significant event risk embedded in the “back and forth” of the policy debate – think US-China trade war, Brexit negotiations, and oil production decisions by the Organization of Petroleum Exporting Countries (OPEC).
In this article, we first describe in greater detail these three phases of event risk – (1) central bank put, (2) known dates and unknown outcomes, and the current (3) extended binary policy debates. We examine the different risk management challenges presented by each phase of event risk. Looking forward, we will analyze several different event risk debates. Our conclusions are that risk managers have little choice but to adopt dynamic risk management strategies.