FX carry strategies (part 1)
FX forward-implied carry is a valid basis for investment strategies because it is related to policy subsidies and risk premia. However, it also contains...
Finding implicit subsidies in financial markets
Implicit subsidies in financial markets can be defined as expected returns over and above the risk free rate and conventional risk premia. While conventional...
Commodity pricing
A new paper combines two key aspects of commodity pricing: a rational pricing model based on the present value of future convenience yields...
Fixed income carry as trading signal
Empirical evidence for 27 markets suggests that carry on interest rate swaps has been positively correlated with subsequent returns for the past two decades....
The correlation risk premium
The correlation risk premium is a premium for uncertainty of future correlation of securities among each other or with a benchmark. A rise in...
Gold: risk premium and expected return
An empirical paper suggests that the risk premium and excess return on gold have been time-varying and predictable, also out-of-sample. The key predictors have...
The downside variance risk premium
The variance risk premium of an asset is the difference between options-implied and actual expected return variation. It can be viewed as a price...
The 1×1 of risk perception measures
There are two reasons why macro traders watch risk perceptions. First, sudden spikes often trigger subsequent flows and macroeconomic change. Second, implausibly high or...
Fear of drawdown
Experimental research suggests that probability of outright loss rather than volatility is the key driver of investor risk perceptions. Moreover, fear of drawdown causes...
Covered interest parity: breakdowns and opportunities
Since the great financial crisis conventional measures of the covered interest parity across currencies have regularly broken down. Two developments seem to explain this....
RECENT ARTICLES
The importance of volatility of volatility
Options-implied volatility of U.S. equity prices is measured by the volatility index, VIX. Options-implied volatility of volatility is measured by the volatility-of-volatility index, VVIX....
Low rates troubles for insurances and pension funds
A CGFS report highlights the pressure of a ‘low for long’ interest rate environment on life insurance companies and defined-benefit pension funds. This pressure...
Seasonal effects in commodity futures curves
Seasonal fluctuations are evident for many commodity prices. However, their exact size can be quite uncertain. Hence, seasons affect commodity futures curves in two...