SPECIAL: Liqudity
Volcker Rule and liquidity risk
The Volcker Rule has banned proprietary trading of banks with access to official backstops. Also, market making has become more onerous as restrictions and...
The illiquidity risk premium
The illiquidity risk premium is an excess return paid to investors for tying up capital. The premium compensates the investor for forfeiting the options...
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...
SYSTEMIC RISK
Update on the great public debt issue
The latest IMF fiscal monitor is a stark reminder of the public finance risks in...
How to prepare for the next systemic crisis
Systemic crises are rare. But they are make-or-break events for long-term performance and social relevance...
Modern financial system leverage
Leverage in modern financial systems arises from bank balance sheets and off-balance sheet transactions that...
The shadow of China’s banks
Unlike in the U.S., shadow banking in China is dominated by commercial banks, not securities...
The danger of volatility feedback loops
There is evidence that the financial system has adapted to low fixed income yields through...
SYSTEMATIC VALUE
FX carry strategies (part 2): Hedging
There is often a strong case for hedging FX carry trades against unrelated global market...
FX carry strategies (part 1)
FX forward-implied carry is a valid basis for investment strategies because it is related to...
A simple rule for exchange rate trends
Over the past decades developed market exchange rates have displayed two important regularities. First, real...
Finding implicit subsidies in financial markets
Implicit subsidies in financial markets can be defined as expected returns over and above the...
Commodity pricing
A new paper combines two key aspects of commodity pricing: a rational pricing model...
POPULAR POSTS
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...
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,...
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...
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...
Understanding market beta in FX
The beta of an investment measures its sensitivity to “market returns”. Unlike in equity, in FX the relevant benchmark for a beta cannot be a...
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...