#### 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

### 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...

### Policy rates and equity volatility

Measures of monetary policy rate uncertainty significantly improve forecasting models for equity volatility and variance...

### The 1×1 of risk perception measures

There are two reasons why macro traders watch risk perceptions. First, sudden spikes often trigger...

### The consequences of increased financial collateralization

There has been a strong upward trend in collateralization since the great financial crisis. Suitable...

#### SYSTEMATIC VALUE

### The danger of volatility feedback loops

There is evidence that the financial system has adapted to low fixed income yields through...

### Information inefficiency in market experiments

Experimental research illustrates the mechanics of market inefficiency. If information is costly traders will only...

### Basic theory of momentum strategies

Systematic momentum trading is a major alternative risk premium strategy across asset classes. Time series...

### Clues for estimating market beta

A new empirical paper compares methods for estimating “beta”, i.e. the sensitivity of individual asset...

### The point of volatility targeting

Volatility targeting adjusts the leverage of a portfolio inversely to predicted volatility. Since market volatility...

#### 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,...

### 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...

### 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...

### 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...

### 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...