Fiat news and the connection between political risk and market risk

Date: November 30, 2017

 This post is the first in a series of pieces written by members of the StatPro client services teams.

Fiat News

Among the key note speakers at the Risk Hedge USA 2017 conference in New York City this fall was Dr. Ben Hunt, Chief Risk Officer of Salient Partners. In his speech, Dr. Hunt discussed the relationship between political volatility and market volatility (Hunt 2017).

Dr. Hunt argued that the connection between political risk and market risk is broken because of the “fiat news” phenomenon. “Fiat news” is named in reference to “fiat money,” which derives its value from the faith and credit of an economy – and not the value of some physical commodity. Then “fiat news” is an artful term implying that the value of information is derived from the credence we grant to it, or the strength of marketing, and not by the value of truth (statements of fact). News agencies, or in general those parties communicating news of political events, are therefore managing market expectations rather than imparting factual information as such. 

This concept of a historical “framing” of periods of market stress is utilized in the scenario analysis functions offered in Revolution Alpha. The scenario tool allows users to “replay” market model behavior during windows of time, generally defined around historical periods of market stress. This enables users to frame questions about how their portfolios might fare during significant market events.


Talk the Talk

Remember the collapse of Lehman Brothers, the recent Greek sovereign debt crisis, and Brexit? Each of these events have something in common: political policy makers playing pivotal roles in managing markets’ expectations for event outcomes. There were often news stories that served not only as “signs of the times,” but themselves defined the historical moment. For instance, consider the role of the U.S. Federal Reserve System in the 2007-2008 financial crisis (Barr 2008).

Policymaking sometimes came second to policy makers’ commentary on policies, in terms of their effect on markets during the financial crisis. U.S. Treasury Secretary Hank Paulson first intimated he would use his authority to orchestrate a federal government takeover of Fannie Mae and Freddie Mac during a July 2008 Senate Banking Committee hearing when he uttered the memorable words, “If you have a bazooka in your pocket and people know it, you probably won’t have to take it out” (Isidore 2008).

While conditions at Fannie and Freddie had indeed deteriorated, as noted by Paulson in the hearing, the mere mention of the “bazooka” was enough to trigger share prices of the two firms to plunge, leading the Fed to make good on its threat and pull out the big guns. Fannie and Freddie were placed into conservatorship on September 7. Share prices of Freddie Mac, in particular, fell from $13.46 on July 8 to $5.26 on July 15, and then finally to $0.88 on September 8.

“The ability of central banks’ ‘talk’ to move financial markets – and thus affect the whole economy – is familiar to even casual newspaper readers,” notes Alan Blinder in his book on the topic, How Do Central Banks Talk? (Blinder 2001). Today, however, FOMC meetings, Senate Banking Committee hearings, and other briefings and press statements by central bankers are livestreamed over multiple media sites. The “talk” is newsworthy information, carefully meted out to the market, with specific intended effects: in this case, perhaps a reassurance for an international audience, to prevent the value of the US Dollar from falling farther.


Event-Driven Scenario Analysis 

Whatever the ultimate effects of these central bank statements, they marked seminal moments in the financial crisis. Periods of historical stress are often defined by inflected moments at either end: “goal posts” marked by a steep price decline at the beginning of a period, and a recovery at the end. In the case of the Fed’s intervention in the markets, we could define the historical stress period as the two-month window between these landmark news events: Treasury Secretary Paulson’s emergency statements in July, and his announcement of the Fannie Mae-Freddie Mac bailout on September 7.

If the overall goal of event-driven scenario analysis is to choose “plausible but unlikely events, and to address how these events might affect the risk factors relevant to a portfolio” (see Lopez 2005), then one might choose to define the event post hoc as the window between the “moment of doom” and the turn toward recovery, from the perspective of this period for the portfolio.

For example, using the S&P 500 Index as a benchmark for a US equities portfolio over the period July 15, 2008 through September 7, 2008, annualized volatility was 22.4%, compared to annualized volatility of 7.9% for that same range of days in 2017. The date range bracketing key events in the housing crisis serves as a neat economic rationale for capturing this window of historically high volatility.

This is a simplified benchmarking example, whereas the Revolution Alpha tool allows for a more sophisticated “shock” to all market model indices at once for the historical period in question. You can capture the effects of correlations among your portfolio’s many underlying risk drivers.


Key Takeaways

  • Policy makers’ talk makes markets move.
  • Periods of historical stress in the markets are defined by key historical events.
  • You can use the scenario analysis functions offered in Revolution Alpha tool to see how your portfolio would fare in periods of market stress.



Rebecca Berge is a Client Consultant for the StatPro Revolution Alpha service.



Barr, Colin. “Paulson Readies the ‘Bazooka.’” FORTUNE Archive. Last modified 7 Sep 2008. <>. 

Blinder, Alan S. How Do Central Banks Talk? Centre for Economic Policy Research (Great Britain): 2001. Print.

Hunt, Benjamin. “Political Risk in an Uncertain Climate.” Afternoon keynote address, RiskHedge USA 2017. New York, NY. 28 Sep 2017.

Isidore, Chris. “Paulson in Hot Seat over Fannie, Freddie.” CNN. Last modified 15 July 2008. <>.

Lopez, Jose. “Stress Tests: Useful Complements to Financial Risk Models.” FRBSF Economic Letter. Federal Reserve Bank of San Francisco. Last modified 24 June 2005. <>.


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