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IHS Markit Fair Value Case Study

16 January 2020

Tokyo Stock Exchange Holiday
December 31, 2019 - January 5, 2020



IHS Markit Fair Value in Review

The Tokyo Stock Exchange was closed from December 31st through January 5th to celebrate the New Year. In the absence of readily available quotes, IHS Markit provided fair value prices for Japanese securities during this holiday. Using fair value pricing ensures that long-term investors in the fund benefit from the most accurate share price possible.

On January 4, 2020, a top Iranian commander was killed during U.S. airstrikes, thus escalating U.S./Middle East tensions and leading to a slump across the global markets. Since Japan markets were closed during this time, they could not react to this event, but our multifactor fair valuation model successfully captured these events for the Japanese stocks.

IHS Markit Fair Value Results

Throughout the Tokyo stock exchange holiday, IHS Markit continued to provide fair value prices, calculated using patent-pending multi-factor methodology, for 3000+ Japanese securities. Global, regional, sector, and entity specific factors were used to indicate macro and micro level risks. The most common input factors in the IHS Markit Japanese fair valuation models included:

• iShares MSCI Japan ETF
• S&P Futures
• Nikkei Futures
• Sector ETFs
• Japanese ADRs
• Currency JPY.USD

Table 1 highlights average directional correctness, closer to open and arbitrage reduction for IHS Markit's Japanese universe respectively during the exchange holiday. These metrics are defined in the appendix on page five. The table indicates that the fair value prices of 2300+ Japanese securities (81%) were closer to the open price when Japan resumed trading on January 6, 2020.

Japan's Nikkei 225 Index in Aggregate

On December 31, 2019, a pro- Iranian militia stormed the U.S. embassy in Iraq, drastically escalating an already tense relationship between the two nations. As seen in the chart below, global factors contributed to an aggregate decrease of -0.57% in our fair valuation of the Nikkei 225.

In the two days following the incident, the protestors dispersed, and world markets readjusted, causing our fair valuation of the Nikkei 225 to increase back above the December 31st close.

Things changed on January 3, 2020 when Qasem Soleimani, Iran's most influential military figure, was killed in an air raid. The markets were swift to respond and our last fair valuation of the Nikkei 225 saw a nearly 1% drop from last close.

The chart below tracks the fair value adjustment of the Nikkei 225 throughout theclosure.

Chart 1: Nikkei 225 Fair Value Adjustment
Large cap with significant movement

The majority of the Japanese stocks opened down after the New Year's holiday. Table 2 outlines how IHS Markit's Fair Value captured a significant amount of holiday movement in some of the largest Japanese securities in terms of market cap.



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

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Appendix

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.

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.


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