There is concern about the risk in the current markets given the high valuations. In a perfect world, investors would like early warnings of market stress as an indicator that it is time to rebalance portfolios. Identifying different stress indicators will allow investors to triangulate on the true market environment. One that I have been recently focused on is SRISK from the website V-Lab.
SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage, and risk. The current numbers show that the world SRISK is falling. There has been a significant decline in developed markets, but emerging markets are moving to high levels specifically because of the large increase in China risk. As a large economy, China's risk is passing through to the rest of the world.
The concern is spillover risk from China to the rest of the world.
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