After you successful distinguish political risk from policy risk (See Step 1 HERE), risk managers and strategists must start the process of measuring exposure to public policy risks for two reasons. First, since public policy risks have not previously been priced explicitly, latent risks can lurk in portfolio positions generating unanticipated risks. Second, actively measuring public policy risks provides advanced insight into public policy trajectories, fueling smarter alpha generation.
Why You Must Measure Public Policy Risks
The short answer: to minimize exposure to unanticipated shifts in policy trajectories which adversely impact the underlying economics of your position.
We are not alone in seek the direct correlation between decreased policy uncertainty and smarter investment decisions. Consider the ECB Working Paper released over the weekend (which the PolicyScope Platform surfaced to our attention this morning) regarding the impact that uncertainty plays in the effectiveness of lender-of-last-resort (LOLR) policy communications:
We believe the principle applies well beyond the LOLR context. Decreased uncertainty by definition means investors and bankers have greater confidence in the decisions they make. It also means they make smarter decisions, so long as they have good data to support those decisions.
Until recently, it has been difficult if not impossible to acquire objective data concerning the public policy process due to a mismatch of data types. Policy risk is expressed in terms of unstructured verbal data. Financial and economic risks are express in terms of structured integers. Advances in Natural Language Processing and our patented process changes everything.
How To Measure Public Policy Risks -- February 10 Webinar with PRMIA
We are honored that the leading professional association for the risk measurement industry has asked us to share our insights and research so far.
Please join us on Wednesday, February 10 to explore the ways in which PolicyScope data can power advanced insights into policy risks and trajectories. Using our data plus some rather simple mathematical formulae, market participants can make smarter, data-driven decisions regarding strategic positioning relative to the public policy cycle.
PolicyScope data is available through the Bloomberg Enterprise Access Point.
Customized widgets and dashboards are available via API HERE.