The concept of “real financial exchange rates”
A Bundesbank paper proposes a new type of real exchange rate index. Rather than measuring the competitiveness of goods markets, this “real financial exchange...
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...
Equity values and credit spreads: the inflation effect
A theoretical paper shows that a downward shift in expected inflation increases equity valuations and credit default risk at the same time. The reason...
The predictability of market-wide earnings revisions
Forward earnings yields are a key metric for the valuation of an equity market. Helpfully, I/B/E/S and DataStream publish forward earnings forecasts of analysts...
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...
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...
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...
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...
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Rebalancing and market price distortions
Price distortions are an important source of short-term trading profits, particularly in turbulent markets. Here price distortions mean apparent price-value gaps that arise from...
Equity return anomalies and their causes
The vast range of academically researched equity return anomalies can be condensed into five categories: return momentum, outperformance of high valuation, ...
Basic factor investment for bonds
Popular factors for government bond investment are “carry”, “momentum”, “value” and “defensive”. “Carry” depends on the steepness of the yield curve, which to some...