Navigating Risk in a Changing World — A Conversation with Robert Engle Part 1

We sat down with him to explore three pressing dimensions of risk that are currently shaping global investment decisions: geopolitical risk, market concentration, and climate risk. Each of these themes is structurally transforming the financial landscape, challenging traditional models and investment styles, as well as requiring new tools and insights.

Moderating the conversation is our Head of Quantitative Research, Dr. Gianluca De Nard, who has collaborated and published with Engle on topics such as climate risk modeling, volatility forecasting and portfolio optimization. Together, they offer a deep and pragmatic look into how risk is evolving—and how investors can prepare.

Part 1: Geopolitical Risk and Global Uncertainty

In this first part of our exclusive conversation with Nobel Laureate Robert Engle, we dive into the rising tide of geopolitical risk and how it manifests in financial markets. From pandemics to tariffs to war, these events have become global economic shockwaves and they’re increasingly hard to predict. Global uncertainty has moved to the forefront of investor concerns.

Rethinking Geopolitical Risk

Traditional geopolitical risk indices often rely on news sentiment or expert assessment. But Engle’s research team, particularly through NYU’s V-Lab, takes a different path looking directly at financial markets to extract what he now calls “Common Volatility Risk,” or CoVol.

Gianluca De Nard: “Are there days when news is so impactful that markets all over the world move more than their forecasted volatilities?”

Robert Engle: “Those are common shocks—often geopolitical in nature—but also economic, medical, or otherwise.”

This statistical approach identifies global volatility spikes across countries and asset classes. Think February 20, 2020 (COVID shock), Brexit, or post-9/11 reopenings. "Not all major news events create common market shocks. For example, Russia’s invasion of Ukraine didn’t trigger significant spikes in their model: Some events that you’d expect to matter—like the start of the Ukraine war—don’t show up as global volatility events. That might be because markets weren’t materially exposed, or because the US actually benefitted economically via defense spending.”

Tail Events and Investment Implications

So how should investors respond to this new volatility regime? For Engle, it’s clear that geopolitical shocks function as tail risks—sudden, extreme, and often poorly forecasted: “They affect many assets at once—so you get these portfolio-wide drawdowns even when your exposure seems diversified.”

One potential response? Adjust country exposures based on their CoVol factor loadings—that is, how sensitive each country’s markets are to these global volatility spikes. Engle notes that countries with high exposure to common volatility shocks may warrant lower weights in a risk-optimized portfolio: “Smaller or more disconnected economies might offer diversification benefits. But they often have lower weights in traditional evaluated indices, so this takes you away from the benchmark.”

This approach calls into question passive investing strategies, which often overweight concentrated markets like the U.S and shows the benefit of well-managed risk-optimized portfolios with less concentration risk on country, sector and even company level.

A Structural Shift in Global Risk?

De Nard: “We’re clearly in a more unstable geopolitical environment. So, is this a short-term spike—or a long-term regime change?”

Engle: “I don’t think we’ve seen a major trend in VIX-levels that would confirm a structural shift,” Engle says. “But we are seeing more persistent surprises—and markets reacting more violently to them.”

He’s particularly concerned about the return of tariff wars: “The Trump tariff announcements ranked among the top global risk events in our index. These kinds of policy shocks have real downside. It’s the opposite of everything we learned from trade economics.” 

Engle expresses concern about the irrationality of some geopolitical decisions, particularly tariffs and deglobalization: “Modern economics is being thrown in the trash can. Reindustrializing the US won’t create jobs—it’ll just hire robots, at high cost.”

The current environment, he argues, could reflect a political and economic pivot toward fragmentation—one with serious implications for long-term growth, inflation, and financial stability. These risks should not be overlooked when making investment decisions. In times of financial turmoil, a well-designed and systematic investment strategy becomes more important than ever.

Geopolitical instability may dominate today’s headlines, but market structure itself poses another significant source of risk. In particular, the concentration of returns in a few mega-cap tech stocks has left investors exposed in ways traditional risk models often fail to capture.

In the second part of our conversation, we shift from geopolitical events to the structural risks within equity markets themselves, including the dominance of passive investing, overconcentration in U.S. tech stocks, and whether we're approaching another valuation bubble.