Risky Business: the Changing Face of Risk During the Pandemic

Following a collapse in risk pricing and models during the market disconnect in 2020, Annabel Smith (The Trade News) explores the ripple effect in the cash and futures markets with Carl Dooley, head of European trading at Cowen.

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The COVID-19 pandemic threw firms into disarray as we tumbled into a bear market in the first three weeks of March. With this development, a second pandemic of doubt and fear was taking place under the surface.

Volatility meant that few people could predict the future and this unpredictability saw appetite for risk weaken as market participants began to view their investments through a more cautious lens.

This in turn has meant investors from both the buy-side and sell-side are less likely to want to take on risk.

The Cboe volatility index, otherwise known as VIX, hit a record high of 82.69 on 16 March. Also referred to as the 'fear gauge' or 'stress gauge', the VIX provides a measure of investor confidence and market risk. As the VIX soared investors hurried to exit risky positions and hedge against potential future risk.

'If you look at buy-side mentality, it has somewhat shifted away from aggressively requesting risk from high-touch trading desks over the last six to nine months,' says Carl Dooley, head of European trading at Cowen.