SPECIAL: Volatility
The “low risk effect” in financial markets
Low-beta and low-volatility securities can produce superior risk-adjusted returns. Thus, portfolios of calibrated low- versus high-vol stock positions have historically generated significant alpha. Other asset...
Volatility risk premia and FX returns
Volatility risk premia – differences between implied and realized volatility – are plausible and empirically validated predictors of directional foreign exchange returns, particularly for...
The power and origin of uncertainty shocks
Uncertainty shocks are changes in beliefs about probabilities. They are perhaps the most powerful driver of financial markets. Uncertainty comes in various forms, such...
SYSTEMIC RISK
Building international financial conditions indices
IMF staff has developed global financial conditions indices for 43 global economies. Conceptually, these indices...
Trend following and the headwinds of rising yields
The decline in bond yields over the past decades has supported profitability and diversification value...
Inflation: risk without premium
Historically, securities that lose value as inflation increases have paid a sizable risk premium. However,...
The macroeconomic impact of Basel III
The regulatory capital reform for banks increases capital costs and credit spreads charged on clients....
The global debt overhang
A new IMF report illustrates that a large share of both advanced and emerging economies...
SYSTEMATIC VALUE
Fear of drawdown
Experimental research suggests that probability of outright loss rather than volatility is the key driver...
The demographic compression of interest rates
Declining population growth and rising dependency ratios in the developed world have been one key...
Predicting asset price correlation for dynamic hedging
Dynamic hedging requires prediction of correlations and “betas” across asset classes and contracts. A new...
Global market portfolio: construction and performance
A representative market portfolio can be built as the capitalization-weighted average of global equity, real...
Cross-asset carry: an introduction
Carry can be defined as return for unchanged market prices and is easy to calculate...
POPULAR POSTS
Trend following as tail risk hedge
Typical returns of a trend following strategy carry features of a “long vol” position and have positive convexity. Typical returns of long only strategies,...
Why the covered interest parity is breaking down
Deviations in the covered interest parity have become a regular phenomenon even in developed markets. Persistent gaps between on-shore and FX-implied interest rate differentials (“cross-currency...
The world’s negative term premium
The term premium on the “world government bond yield” has turned decisively negative, according to BIS research. Investors have since 2014 accepted a long-term...
The four components of long-term bond yields
A BOJ paper proposes an affine terms structure model for bond yields under consideration of the zero lower bound. It estimates the contribution of...
The term premium of interest rate swaps
A Commerzbank paper proposes a practical way to estimate term premia across interest rate swap markets. The method adjusts conventional yield curves for median...
Leverage in asset management
Asset managers can use leverage to enhance returns. Outside hedge funds, such leverage is modest as share of assets under management. However, considering the huge...