High returns and fat tails on both sides when rates are “low”. The benchmark portfolio has had a real return of 4.2% when interest rates have been in the “low” range, higher than the two other regimes, but not as impressive as in the 12-month inflation analysis. The risk effect is the same, though: fat tails on both sides push the risk up. In the “low” interest rate environment, the historical VaR was 23.7%, clearly above the full sample’s 16%. The nominal return of 6.8% is below the full sample average, and the risk increase is even sharper with nominal historical VaR close to twice as high as full sample and CVaR above 40%. As with 12-month inflation, the “low” regime has both the biggest gains and the biggest losses.Click on charts to enlarge, courtesy of SEB.
While we have had good returns recently, is it time for fat tails now?