Market risk and uncertainty are connected with the uncertainty we see in the macro world. They are connected. Spikes in the VIX index and realized volatility will be tied to uncertainty with macro variables and their link with future values. This is evident with the JLN uncertainty indices and financial risk measures. See Uncertainty Data from Sydney Ludvigson for the details on the macro uncertainty index.
Focusing on this link is critical because it makes investors more macro aware of risks. Macro uncertainty spikes during recessions. Financial risk may spike at other times, but the key driver is financial risk is macro risk.
In 2023, we have seen banking risks, debt ceiling risks, monetary policy risks, and recession risk issues. All have created an environment that changes stock and bond risks and have impacted the return profits for investors. These periods of uncertainty can define a decade. See the return patterns from the AQR paper, "Certainly Uncertain". While long-term Sharpe ratios seem stable, the returns over a given uncertain environment may be significantly different.
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