How to construct a bond volatility index and extract market information
Volatility indices, based upon the methodology of the Cboe volatility index (VIX), serve as measures of near-term market uncertainty across asset classes. They are...
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...
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...
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Inflation as equity trading signal
Academic research suggests that high and rising consumer price inflation puts upward pressure on real discount rates and is a headwind for equity market...
Economic growth and FX forward returns
Economic growth differentials are plausible predictors of foreign exchange return trends because they are related to differences in monetary policy and return on investment....
How to use FX carry in trading strategies
FX forward-implied carry is a valid basis for trading strategies because it is related to divergences in monetary and financial conditions. However, nominal carry...