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Event Risk

Little changed tactically over the past week. Most markets we follow continue to experience various forms of volatility contraction—ranging from tight consolidations (precious metals and some softs), to larger-scale consolidations (Treasury futures and many currencies), to contracting volatility in well-trending markets (equities). We believe that this brings an element of risk to the table that is difficult to capture in traditional risk management models: it is quite likely that a single event (it is futile to speculate about the nature of this catalyst) could cause a sharp movement across many normally uncorrelated markets. While this brings obvious correlation risk, there is a deeper danger: volatility is also likely to expand across these markets (formally, the risk is in the correlation of the rates of change of the volatilities) leaving many traders holding much larger than expected risks. Always know your models and their limitations and adjust accordingly.........please open the attached PDf to read the entire 21 page report.

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