Practical Applications of Novel Risks Virtual Panel Discussion, December 2021

Abstract

In connection with the release of the The Journal of Portfolio Management 2021 special issue on novel risks, JPM editor Frank Fabozzi moderated a virtual panel discussion on novel risks and their importance to investors. The panelists were Richard Berner (New York University), Irene Monasterolo (EDHEC Business School), Joe Simonian (Autonomous Investment Technologies), and Wylie Tollette (Franklin Templeton). The full panel discussion is available for viewing at https://www.pm-research.com/novel-risks/watch.

The panelists highlighted the following novel risks as challenges for investors in the current environment: 1) the search for yield in a return-starved word, 2) inflation at levels that have not been seen for three decades in most of the developed world, 3) bloated balance sheets at central banks, 4) ESG risks (including climate risk), 5) geopolitical risks, 6) pandemic risks, 7) cyber risks, 8) model risk, 9) risks associated with digital assets, and 10) risks associated with nonbank financial intermediation. The panelists noted that the paucity of relevant historical data for analyzing the novel risks means that investors must turn to other techniques, such as scenario analysis and stress testing, for managing such risks. Moreover, the challenge of analyzing novel risks is compounded by the fact that they may produce nonlinear effects and may interact in ways that cause them to amplify each other (e.g., environmental risks and geopolitical risks). The challenge is further amplified by the fact that many novel risks are primarily relevant over time horizons longer than one or two years. As noted by panelist Joe Simonian, “we tend to overestimate the changes that will occur in the next one or two years and underestimate the changes that will occur over the next 10 years.”