Self-fulfilling and self-destructing FX carry trades

When foreign exchange trading meets inflation-targeting self-fulfilling investment strategies are possible. A technical paper by Plantin and Shin shows that positive FX carry encourages...

Why and when “equity duration” matters

A new HSBC report suggests that if and when Quantitative Easing is being reversed it could be a watershed event for sectoral equity performance....

The danger of volatility feedback loops

There is evidence that the financial system has adapted to low fixed income yields through an expansion of explicit and implicit short volatility strategies....

Inefficient benchmarking and trading opportunities

Academic research explains how benchmarking induces investment managers to buy overvalued highly volatile assets. This makes markets inefficient and may even lead to a negative relation between...

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...

Understanding duration feedback loops

When long-term government bond yields are low enough, further declines can ‘feed on themselves’. European insurance companies and pension funds are plausible catalysts. The...

Commodity exchange prices: The curious case of aluminum

Goldman Sachs Research takes another look at soaring warehouse queues and fears of price distortions in the aluminum market (see previous post here). A...

How fear of disaster affects financial markets

Fear of economic disasters, such as depressions, is more frequent than their actual occurrence. People tend to perceive a growing risk of disaster as...

Updated summary: Shadow banking and asset management

Easy monetary conditions and tighter regulation for banks naturally encourage risk transformation and liquidity creation outside the banking system. Institutional asset managers are key agents of that...

Using VIX for forecasting equity and bond returns

Over the past 25 years the relation between implied equity volatility (VIX) and market returns has been non-linear. When VIX was low there was no meaningful relation....

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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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