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...
Signaling systemic risk
Systemic financial crises arise when vulnerable financial systems meet adverse shocks. A systemic risk indicator tracks the vulnerability rather than the shocks (which are...
How to estimate risk in extreme market situations
Estimating portfolio risk in extreme situations means answering two questions: First, has the market entered an extreme state? Second, how are returns likely to...
Understanding China’s “financial policy”
In most developed countries macroeconomic management is the domain of separate fiscal and monetary policies. In China, the focus is on “financial policy”, a...
ECB policy framework in six basic points
The European Central Bank is one of the most powerful institutions in the world and is running a particularly complex policy framework. For macro...
How systemic financial risk is measured
Public institutions have developed a wide range of methods to track systemic financial risk. What most of them have in common is reliance on...
How convenience yields have compressed real interest rates
Real interest rates on ‘safe’ assets such as high-quality government bonds had been stationary around 2% for more than a century until the 1980s....
How regulatory reform shapes the financial cycle
Ambitious regulatory reform has changed the dynamics of the global financial system. Capital ratios of banks have increased significantly, reining in bank credit. Counter-cyclical...
Predicting equity volatility with return dispersion
Equity return dispersion is measured as the standard deviation of returns across different stocks or portfolios. Unlike volatility it can be measured even for...
RECENT ARTICLES
How central banks can take nominal rates deeply negative
The popular view that nominal interest rates have a natural zero lower bound has become obsolete in modern financial systems. It may be more...
Systematic trading strategies: fooled by live records
Allocators to systematic strategies usually trust live records far more than backtests. Given the moral hazard issues of backtesting in the financial industry, this...
Bayesian Risk Forecasting
Portfolio risk forecasting is subject to great parameter uncertainty, particularly for longer forward horizons. This simply reflects that large drawdowns are observed only rarely,...