Impact of Risk Management on the Recent Market Volatility in the U.S. and Japan

Abstract

While interpreting violent market movements can potentially be illuminating, many experienced finance practitioners shy away from this exercise, having recognized the difficulty of this task. At the same time, the majority of them appears to have accepted the premise that supply‐and‐demand dislocations have emerged as increasingly influential forces driving fixed income markets. In both business‐as‐usual and catastrophic market environments, their impact on interest rates, credit spreads, and implied as well as realized volatilities rivals that of geopolitical events, economic fundamentals, and credit crises.