At the market regime changes abruptly, Risk Managers should be ready for a rude awakening. Risk management is inherently backward-looking. When regimes change all risk inputs (betas, gamma, correlations) flip dramatically. For example, a stock beta is an inherently lagging indicator: – when a stock is underperforming its beta could be 1.2-1.8 easily, and when it starts bottoming out, its beta starts quickly declining. Check out the Betas of obscure Energy stocks last 1-2 years as they have regained market leadership.
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