Applied Research

The Germany Coalition Quandary

In the paper, Christoph takes a look at the ongoing German coalition discussions as well as the recent market environment in Europe, marked by a number of notable elections (including the Dutch general election, the French presidential election, and the UK general election). Ahead of the general vote by Social Democratic constituents in the first week of March, Christoph analyses several potential outcomes to German political parties’ last-minute failure to form a coalition. 

Using recent European elections for historical correlations, Christoph applied transitive stress testing capabilities in Axioma Risk to estimate the impact of such a shock on a euro-denominated multi-asset class model portfolio. The first calibration period covered the run up to the French presidential and UK general elections, during which the EUR/USD exchange rate and global stock markets were positively correlated; the second calibration period showed similar correlations between equity and FX risk factors, resulting in a stronger market reaction to the exchange rate shock. Both stress tests showed severe developed stock market losses; however, exchange rate changes were very different in each scenario.

Author: Christoph V. Schon, CFA, CIPM, Executive Director, Applied Research


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