Using VIX for forecasting equity and bond returns
Over the past 25 years the relation between implied equity volatility (VIX) and market returns has been non-linear. When VIX was low there was no meaningful relation....
Disaster risk and currency returns
A paper by Farhi and Gabaix explains how fear of global crisis leads to outperformance of risky versus less risky currencies. Carry trades have...
The Federal Reserve’s increased influence on financial markets
A new empirical study suggests that the Federal Reserve has exerted a stronger influence on fixed income, commodity, and currency markets since it started...
Central clearing and systemic risk
The expansion of central clearing has created a greater interconnectedness of financial markets and new systemic risks. Large losses of some of clearing members...
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...
Multiple risk-free interest rates
Financial markets produce more than one risk-free interest rate. This is because there are several separate market segments where structured trades replicate such a...
The impact of regulatory reform on money markets
A new CGFS paper suggests that bank regulatory capital and liquidity changes may reduce liquidity in money markets, create steeper short-term yield...
Quantitative easing and “VaR shocks”
Securities held by VaR (Value-at-Risk)-sensitive institutional investors, such as banks, are prone to escalatory selling pressure after an initial shock, in particular if they...
Mutual funds and market dislocations
The IMF Financial Stability Report highlights two systemic weaknesses of plain-vanilla mutual funds: incentives for end investors to rush for the exit in distress...
The pitfalls of emerging markets asset management
Dedicated EM exposure has surged by over 55% since 2007, with assets concentrated on few managers. A new BIS article points out that trading...
RECENT ARTICLES
Algorithmic strategies: managing the overfitting bias
The business of algorithmic trading strategies creates incentives for model overfitting and backtest embellishment: researchers must pass Sharpe ratio thresholds for their strategies to...
Understanding dollar cross-currency basis
Covered interest parity is an arbitrage condition that equalizes costs of direct USD funding and of synthetic USD funding through FX swaps. Deviations are...
Why herding is the death of momentum
Momentum trading, buying winning assets and selling losing assets, is a most popular trading strategy. It relies on sluggish market adjustment, allowing the trader...