The financial stability interest rate

The financial stability interest rate is a threshold above which the real interest rate in an economy triggers financial constraints and systemic instability. It...

Contagion and self-fulfilling dynamics

Contagion and self-fulfilling feedback loops are propagation mechanisms at the heart of systemic financial crises. Contagion refers to the deterioration of fundamentals through the...

Macro uncertainty as predictor of market volatility

Market volatility measures the size of variations of asset returns. Macroeconomic uncertainty measures the size of unpredictable disturbances in economic activity. Large moves in...

Understanding international capital flows and shocks

Macro trading factors for FX must foremostly consider (gross) external investment positions. That is because modern international capital flows are mainly about financing, i.e....

Measures of market risk and uncertainty

In financial markets, risk refers to the probability distribution of future returns. Uncertainty is a broader concept that encompasses ambiguity about the parameters of...

Modern financial system risk for macro trading

Financial system risk is the main constraint and disruptor of macro trading strategies. There are four key areas of modern systemic risk. In...

Public finance risk

Fiscal expansion was the logical response to the 2020 health and economic crisis. Alas, public deficit and debt ratios had already been historically high...

Systemic risk under non-conventional monetary policy

Central bank operations in the form of quantitative easing, qualitative easing, forward guidance and collateral policies wield great influence over market prices of risk....

Risk management shocks and price distortions

Risk management relies on statistical metrics that converge on common standards. These metrics can change drastically alongside market conditions. A risk management shock is...

Unproductive debt

Credit and related interest income have historically been viewed as service and related payment for lending productively. However, in a highly collateralized and risk-averse...

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Statistical arbitrage risk premium

Any asset can use a portfolio of similar assets to hedge against its factor exposure. The factor residual risk of the hedged position is...

Market dynamics: belief, risk, and ambiguity effects

To understand financial market dynamics, it is helpful to distinguish beliefs, attitudes towards risk, and attitudes towards ambiguity. Beliefs are subjective evaluations of future...

Building a real-time market distress index

A new Fed paper explains how to construct a real-time distress index, using the case of the corporate bond market. The index is based...

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