The unprecedented levels of volatility in the current market have resulted in an increase in the requirements for valuations services, according to Rob Haddad, director of Interactive Data’s Evaluated Services business. Speaking during the vendor’s recent webcast, “Impact of volatile markets on fair valuation of international funds”, Haddad indicated that funds are invoking fair value procedures more frequently than ever before as a result of the high volatility in the market.
The vendor highlighted the survey results of a study examining volatility and valuations between 2004 and 2008 as proof of this correlation. The movement of the US markets with regards to volatility was therefore in correlation with the predictability and model performance of equity prices, said Interactive Data.
“High market volatility results in a material impact in the way securities perform the next day,” added Haddad. He cited an example of the 29 September 2008, when the S&P 500Index declined 8.8% following the US House of Representatives’ initial rejection of the Emergency Economic Stabilisation Act. The vendor’s Fair Value Information Service adjustments reduced the distance from the local close to the next day’s open by over 89%, he said.
Interactive Data’s service provides subscribers with an input that can be used in their independent fair value determinations and an is evaluation based on an estimate of the price that would prevail in a liquid market for an international, exchange traded equity given information available at the time of evaluation.
The vendor also discussed the concept of trigger levels in the market, which pertain to the magnitude of movement in a market required to cause an automatic invocation of a fund’s fair value procedures. Interactive Data has conducted analysis on publicly available net asset value (NAV) data to explore the use of triggers in the market, said Haddad. “The vast majority of the funds involved in the study were employing a systematic fair value methodology. We estimate that around 94.5% are using this strategy currently.”
Those involved in the webinar, which the vendor estimated to be around 400 clients, participated in an interactive poll on the subject of triggers. The results indicate that the majority are using fair value measurements every day (at 34.5%), closely followed by a trigger level of 50 basis points (30.3%).
The vendor also identified a trend towards firms using fair value measurements beyond the traditional area of equities and into international equity futures and options. Interactive Data launched a new service to meet these requirements last year and is currently exploring the idea of adding services for international fixed income securities in the near future.