Detecting market price distortions with neural networks

Detecting price deviations from fundamental value is challenging because the fundamental value itself is uncertain. A shortcut for doing so is to look at...

How to estimate credit spread curves

Credit spread curves are essential for analyzing lower-grade bond markets and for the construction of trading strategies that are based on carry and relative...

A theory of hedge fund runs

Hedge funds’ capital structure is vulnerable to market shocks because most of them offer high liquidity to loss-sensitive investors. Moreover, hedge fund managers form...

How to recognize an asset price bubble

A new paper from the ETH Zurich defines bubbles as episodes of unsustainable and quickening asset price growth with accelerating corrections and rebounds. In...

Central clearing and systemic risk

The expansion of central clearing has created a greater interconnectedness of financial markets and new systemic risks. Large losses of some of clearing members...

Rebalancing and market price distortions

Price distortions are an important source of short-term trading profits, particularly in turbulent markets. Here price distortions mean apparent price-value gaps that arise from...

U.S. dollar exchange rate before FOMC decisions

Since the mid-1990s the dollar exchange rate has mostly anticipated the outcome of FOMC meetings: it appreciated in the days before a rate hike...

The nature and risks of EM FX carry trades

A new BIS paper provides important lessons for EMFX carry trades, using Latin America as a case study. First, FX carry opportunities depend on market...

The 1×1 of trend-following

Trend-following is the dominant alternative investment strategy. Its historical return profile has been attractive on its own and for diversification purposes. It is suitable for...

Volcker Rule and liquidity risk

The Volcker Rule has banned proprietary trading of banks with access to official backstops. Also, market making has become more onerous as restrictions and...

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Crashes in safe asset markets

A new theoretical paper illustrates the logic behind runs and crashes in modern safe asset markets. Safe assets are characterized by stable value and...

Copulas and trading strategies

Reliance on linear correlation coefficients and joint normal distribution of returns in multi-asset trading strategies can be badly misleading. Such conventions often overestimate diversification...

Trend following: combining market and macro information

Classic trend following is based on market prices or returns. Market trends are relatively cheap to produce, popular, and plausibly generate value in the...

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