The risks in statistical risk measures
A DNB paper warns that financial market risk models (such as value-at-risk or expected shortfall) are unreliable. Small variations in assumptions cause large differences...
Metals price distortions and the warehouse system
In a short note Macquarie’s commodity research reviews price distortions and prospective changes related to the warehouse system of the London Metals Exchange (LME). Since...
Self-fulfilling and self-destructing FX carry trades
When foreign exchange trading meets inflation-targeting self-fulfilling investment strategies are possible. A technical paper by Plantin and Shin shows that positive FX carry encourages...
How equity return expectations contribute to bubbles
An updated paper by Adam, Beutel, and Marcet claims that booms and busts in U.S. stock prices can be explained by investors’ subjective capital...
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...
Overconfidence and inattention as asset return factors
Overconfidence in personal beliefs and inattention to new trends are widespread in financial markets. If specific behavioural biases become common across investors they constitute...
How salience theory explains the mispricing of risk
Salience theory suggests that decision makers exaggerate the probability of extreme events if they are aware of their possibility. This gives rise to subjective...
Explaining FX forward bias
Forward bias in foreign exchange markets means that a positive interest rate differential precedes currency appreciation. It has been an empirical regularity in developed...
Trend following in U.S. equities
Trend following is a systematic investment style that takes directional positions in accordance with the difference between the current price and a moving average. For...
Broker-Dealer leverage drives credit and equity prices
A new New York Fed paper shows that financial intermediary leverage is one of the best performing explanatory factors for future credit and equity...
RECENT ARTICLES
Implicit subsidies paid in financial markets: updated primer
Implicit subsidies in financial markets are premia paid through transactions that have motives other than conventional risk-return optimization. They manifest as expected returns over...
The duration extraction effect
Under non-conventional monetary policy central banks influence financial markets through the “portfolio rebalancing channel”. The purchase of assets changes the structure of prices. A...
Tiered reserve systems
Negative monetary policy rates can undermine financial transmission, because they encourage cash hoarding and reduce the profitability of traditional banking. This danger increases with...