On the vulnerability of local emerging debt markets

A new IMF paper provides evidence that increased foreign participation in local-currency emerging debt markets has made these significantly more vulnerable to foreign interest rate and risk...

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...

The price effects of order flow

Order flow means buyer- or seller-initiated transactions at electronic exchanges. Order flow consumes liquidity provided by market makers and drives a wedge between transacted...

Why financial markets misprice fundamental value

Experimental research has produced robust evidence for mispricing of assets relative to their fundamental values even with active trading and sufficient information. Academic studies...

How market liquidity causes price distortions

Liquidity is a critical force behind market price distortions (and related trading opportunities). First, the cost of trading in and out of a contract...

When currency strength and credit booms feed on each other

A  paper by Bruno and Shin illustrates how global banks drive lending booms in local currency markets. Most importantly, they explain how currency strength...

Understanding global liquidity

A new IMF policy paper defines global liquidity as the ease of funding in global financial markets. The concept is useful for understanding the...

Why CDS spreads can decouple from fundamentals

A Bundesbank working paper provides evidence that Credit Default Swap (CDS) spreads change significantly in accordance with (i) the direction of order flows, (ii) the...

A primer on benchmark index effects

An HKMIR paper explains benchmark index changes and shows their significant effects on mutual fund flows and international capital flows. Importantly, there is evidence...

Leverage in asset management

Asset managers can use leverage to enhance returns. Outside hedge funds, such leverage is modest as share of assets under management. However, considering the huge...

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The power of macro trends in rates markets

Broad macroeconomic trends, such as inflation, economic growth, and credit creation are critical factors of shifts in monetary policy. Above-target trends support monetary tightening....

Six ways to estimate realized volatility

Asset return volatility is typically calculated as (annualized) standard deviation of returns over a sequence of periods, usually daily from close to close. However,...

Duration volatility risk premia

Duration volatility risk premium means compensation for bearing return volatility risk of an interest rate swap (IRS) contract. It is the scaled difference between...

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