The predictability of relative asset returns

Empirical research suggests that it is easier to predict relative returns within an asset class than to predict absolute returns. Also, out-of-sample value generation...

Critical transitions in financial markets

Critical transitions in financial markets are shifts in prices and operational structure to a new equilibrium after reaching a tipping point. “Complexity theory” helps...

FX forward returns: basic empirical lessons

FX forward returns for 29 floating and convertible currencies since 1999 provide important empirical lessons. First, the long-term performance of FX returns has been...

Why financial markets misprice fundamental value

Experimental research has produced robust evidence for mispricing of assets relative to their fundamental values even with active trading and sufficient information. Academic studies...

Understanding negative inflation risk premia

Inflation risk premia in the U.S. and the euro area have disappeared or even turned negative since the great financial crisis, according to various...

Debt-weighted exchange rates

Trade-weighted exchange rates help assessing the impact of past currency depreciation on economic growth through the external trade channel. Debt-weighted exchange rates help assessing...

Inflation: risk without premium

Historically, securities that lose value as inflation increases have paid a sizable risk premium. However, there is evidence that inflation risk premia have vanished...

FX strategies based on real exchange rates

New empirical research provides guidance as to how to use real exchange rates for currency strategies. First, real exchange rates can serve as a...

How current accounts mislead FX markets

A common fallacy is that current account deficits measure dependence on external financing. In reality, external balances and cross border financing are only vaguely...

Predicting equity market corrections

Assessing the risk of equity market “crashes”, academic work has focused on price-earnings ratios and bond-stock earnings yield differentials. A recent paper by Lleo...

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Equity index futures returns: lessons of 2000-2018

The average annualized return of local-currency index futures for 25 international markets has been 6% with a standard deviation of just under 20%. All...

U.S. dollar exchange rate before FOMC decisions

Since the mid-1990s the dollar exchange rate has mostly anticipated the outcome of FOMC meetings: it appreciated in the days before a rate hike...

Endogenous market risk

Understanding endogenous market risk (“setback risk”) is critical for timing and risk management of strategic macro trades. Endogenous market risk here means a gap...

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