Macro risk

Macro risk is

funds, to political risk found in different countries, and to the impact of economic or financial variables on political risk. Macro risk can also refer to types of economic factors which influence the volatility over time of investments, assets, portfolios, and the intrinsic value

of companies.

Macro risk associated with stocks, funds, and portfolios is usually of concern to financial planners, securities traders, and investors with longer time horizons. Some of the macroeconomic variables that generate macro risk include unemployment rates, price indexes, monetary policy variables, interest rates, exchange rates, housing starts, agricultural exports, and even prices of raw materials such as gold.

Models that incorporate macro risk are generally of two types. One type focuses on how short-term changes in macro risk factors impact stock returns. These models include the arbitrage pricing theory and the modern portfolio theory families of models.

The other models that incorporate macro risk data are valuation models or the closely related fundamental analysis models. Used primarily by those focusing on longer term investments including wealth managers, financial planners, and some institutional investors, these models are examples of intrinsic value analysis. In such analysis, forecasts of future company earnings are used to estimate the current and expected value of the investment being studied. Macro risk factors include any economic variables that are used to construct these estimates.

Understanding that macro risk factors influence the intrinsic value of a particular investment is important because when the factors change values, errors can be introduced in the corresponding intrinsic value

mathematical programming

methods.

Another way macro risk is used is to differentiate between countries as potential places to invest. In this meaning, the level of a country's macro risk differentiates its level of political stability and its general growth opportunities from those of other countries, and thus helps identify preferred countries for investment either directly or through country or regionally oriented funds. Such analysis of

International rankings

of countries, often updated annually, provide insight into their relative political and social stability and economic growth.

A new application of macro risk is essentially a converse of the first two meanings; it refers to how macroeconomics and fluctuations in financial variables generate political risk. For example, economic turbulence that leads to higher or lower levels of approval for the president's policies would be a form of this macro risk.

References

Burmeister, Edwin; Wall, Kent D. (1986). "The arbitrage pricing theory and macroeconomic factor measures". Financial Review. 21 (1): 1–20.
doi:10.1111/j.1540-6288.1986.tb01103.x
.

Agmon, Tamir; Findlay, M. Chapman (Nov–Dec 1982). "Domestic Political Risk and Stock Valuation". Financial Analysts Journal. 38 (6): 74–77.
JSTOR 4478601
.

Chen, Nai-Fu;
doi:10.1086/296344. Archived from the original
(PDF) on 2009-03-20. Retrieved 2008-12-01.

Chong, James; Halcoussis, Dennis; Phillips, G. Michael (2011). "Does market volatility impact presidential approval?". Journal of Public Affairs. 11 (4): 387–394.
doi:10.1002/pa.410
.

Macro risk

References

External links

Further reading