Market risk is the risk of loss related to fluctuations in the value of a portfolio of financial instruments (shares, bonds, commodities, derivatives, etc.). The risk being linked to the nature of the financial assets, we can distinguish: the interest rate risk (linked to the fluctuation of interest rates), the exchange rate risk (linked to the fluctuation of exchange rates between several currencies), the commodity risk, the share risk (linked to the variation of the share price).
In order to evaluate this risk, several tools are used such as volatility (which is the extent to which a financial asset changes), risk sensitivity, value at risk (VaR) and others. The evaluation of market risk allows financial analysts to better understand the evolution of market prices, and portfolio managers to refine their predictions and thus better manage portfolios of financial assets.
Stylized facts
The upward movement of Tesla shares (Tesla Inc.) in January 2021, led the Bloomberg agency to declare the South African Elon Musk (who holds 18% of the shares) "the richest man in the world" (with a fortune estimated at $188.5 billion). The fortune of Elon Musk is therefore linked to the market risk on his shares. In 2020, Tesla Inc. had already been noticed by a very high volatility on its shares and a price increase of 743.4%. We will see in the weeks and months to come if the volatility of Tesla Inc. will be high.
This event may also make us question the valuation methods of an asset and the positive evolution of several shares despite a gloomy economic context. We will address these questions in our next articles.
CJEA