Bank of America Merrill Lynch introduced a cross-market measure of risks to financial markets that it called the Global Financial Stress Index.

The gauge of risk, hedging demand and investment flows, the bank and brokerage firm said, "is designed to help investors identify market risks earlier and more accurately than commonly used risk indicators," such as the Chicago Board Options Exchange Market Volatility Index, or VIX, a widely followed measure of the implied volatility of S&P 500 index.

The stress index pulls together more than 20 measures of stress across five asset classes and various geographies, the Global Research unit of BofA Merrill Lynch said.

This collecation will be used to measure 3 kinds of stress: risk, including volatility, solvency and liquidity; hedging demand, implied from activity in equity and currency options; and investor appetite for risk, as measured by trading volumes as well as flows in and out of equities, high-yield bonds and money markets.

The index has been in testing since 2000. The Global Research unit said the testing found that sharp rises in the index over short periods of time would have had a high degree of accuracy in forecasting sell-offs in assets, particularly global equities, commodities and U.S. high-yield bonds.

“Since the global financial crisis, risk appears to have become as important to investors as return,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “The GFSI measures risks not normally visible in public markets by incorporating assets trading in the over-the-counter market. We believe its breadth and depth make it a better measure of financial market stress than the VIX, which is based on U.S. options data alone.”

On Monday, the GFSI sat at 0.26, which BofA Merrill Lynch said "indicates marginally elevated market stress."

The Flow sub-index touched a two-year low earlier this month indicating large inflows into risky assets and out of money market funds. This contrasted with stress levels signaled by both the Risk and Skew sub-indices, which remain elevated. The last time such a similar discrepancy between Skew and Flows occurred was in April 2010, just before a sharp decline in the S&P 500.


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