I was in Amsterdam last week, inspecting volatility of canal prices (more later) but volatility was all over the place last week. On Monday, the PRA strenuously defended matching adjustment in Court with the idea that price movements are simply ‘short term’.
It may also assist the Court to know that the PRA is supportive of the principles underlying the MA, not only because (properly implemented) it more appropriately reflects the risks to which annuity providers are exposed but also because it enables firms to “look through” short term volatility in the market price of credit risk to which they (as buy-to-hold investors) are not exposed.
At the same time, our old friend golden.labrador@dogs.k9.gov mailed us to point out that if a firm had sold its bond portfolio at the height of the crisis (see chart above) when spreads had exploded, it would have been considerably worse off than if it had stuck to a buy and hold strategy, as matching adjustment allows you to do.
But where does this take us?
