Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
When market quotations are not readily available, such as when a
foreign security's primary market is closed, many funds switch to
fair value pricing. Using fair value pricing ensures that investors
in the fund benefit from the most accurate share price possible.
IHS Markit provides an independent fair value service that
calculates the best estimate of stock and bond prices outside of
active trading hours. The following case study provides an analysis
of fair value results for the last quarter of 2020 for countries
from the three widely accepted market types: developed, emerging,
and frontier.
2020: From Beginning to End
Beginning with the Shanghai, Shenzhen, and Hong Kong stock
exchanges during the Chinese Lunar New Year in February, the
volatility of 2020 arrived with force and did not relent. The
S&P Futures finished with 103 100+bps movement days in 2020 (15
in Q4), compared to 43 in 2019. Markets around the world swung
wildly in March and April, resulting in trillions of dollars of
losses by mid-spring. By summertime in the Northern Hemisphere, new
cases and death rates slowed. Aggressive monetary policy by central
banks coupled with stimulus bills passed by many governments lead
to losses quickly reversing into new highs. Although there was
significantly increased volatility for the rest of the year, the
bull market continued into Q3 and Q4. The chart below shows the
quarterly returns for various markets indices sorted by development
level. As depicted, the second wave of Covid-19 had little effect
on stock exchanges of all types. The Covid-19 statistics are
cumulative cases, meaning that over half of the regions had
caseloads in Q4 that at least doubled that of the previous three
quarters. Despite these staggering numbers, only one index had a
quarterly return of under 10%.
The table below displays IHS Markit's Fair Value performance for
the final quarter of 2020. IHS Markit's patent pending stepwise
regression model optimizes a combination of global, sector, ADR,
country, and currency factors to estimate equity prices outside of
normal trading hours. The primary function of equity fair value is
to provide these fair valuations to funds where applicable at the
time of NAV calculation. In the table below, the valuation point
for securities in all countries besides the US is New York 4:00PM.
The primary valuation point for US securities is London
12:00PM.
Table 2 shows two fundamental fair value statistics at the
country fund level for Q4 2020. Arbitrageur's Potential Return
without fair value is the return that could be gained if the
arbitrageur trades and the fund use local closing prices.
Arbitrageurs Potential Return with fair value is the return that
could be gained if the arbitrageur trades and the fund make fair
value adjustments. The purpose of comparing these two statistics is
to show how effectively the fair valuations were in capturing
overnight movement. The specific formulas for these statistics are
in the appendix.
In addition to the Potential Arbitrage Return statistics, two of
the main metrics used in fair value are directional correctness and
closer to open. Chart 1 displays the directional correctness and
closer to open metrics at the country level for Q4 2020. The
statistics are grouped by market type and plotted against the
number of days the country's index moved more than 100 bps.
Q4 2020 Highlights: US & International
Securities
As in the tables displaying overall performance, IHS Markit fair
value captured movement with precision at the security level. Table
3 highlights the diverse sets of factors used to capture large
portions of large overnight movements in international
equities.
While 4:00 PM New York and 12:00 London are the main valuation
points, IHS Markit Fair Value publishes hourly batches to ensure
coverage for thousands of securities where applicable 20 hours a
day. Chart 2 highlights performance for a major US firm on an hour
over hour basis, culminating in a final valuation right before US
markets open at 9:30 AM New York time.
On the afternoon of Monday, November 16th S&P Dow Jones
Indices announced that Tesla would be joining the S&P Index on
December 21st after posting five consecutive profitable quarters.
The announcement sent investors into a frenzy in after hours
trading. Chart 2 shows the hourly fair value adjustments in
response to the Tesla news.
IHS Markit's Fair Value service helps clients meet their
regulatory and compliance requirements by providing daily fair
value adjustment factors and prices for over 150,000 equity and
fixed income securities. We provide security-level as well as
aggregate-level fair value adjustment factors across global hourly
snaps with the ability to add custom snap times tailored to client
requests. To learn more, please visit:
ihsmarkit.com/products/pricing-data-fair-value.html or contact:
MK-FixedIncomePricingBusinessDevelopment@ihsmarkit.com
Appendix
Actual Overnight Return: The return of a security from its last
close to its next open, regardless of how long the time gap may
be.
Directional Correctness: Occurs when a fair value price is in
the same direction (+, -) as the actual overnight return of the
underlying security. The values present in the document are the
proportion of securities within a group that were directionally
correct.
Closer to Open: Whether a fair value price is closer to the next
day open than the previous close. The values present in the
document are the proportion of securities within a group that were
closer to open.
Arbitrage Reduction: The amount of the movement in the
underlying security that we captured using our Fair Value price.
These values can be positive or negative, with 100% being full
capture. For tables 1 and 2, the values are the average arbitrage
reduction across the group.
