The world’s negative term premium

August 20, 2016

The term premium on the “world government bond yield” has turned decisively negative, according to BIS research. Investors have since 2014 accepted a long-term yield below expected short-term rates, rather than charging a premium on duration exposure. The compression and inversion of term premia may have been fueled by a global duration carry trade and seems to be a global phenomenon. It has coincided with increased correlation of long-term yields across developed and emerging markets.

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The importance of differentiating types of oil price shocks

August 13, 2016

To assess the consequences of an oil price shock for markets it is important to identify its type. A new method separates oil supply shocks, oil market-specific demand shocks and global growth shocks. Supply shocks have accounted for about 50% of price volatility since the mid-1980s. Oil market-specific shocks drive a wedge between the growth of developed and emerging economies and hence matter for exchange rate trends. Global demand shocks to oil prices do not cause such a divergence.

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Fed policy shocks and foreign currency risk premia

August 5, 2016

A new Federal Reserve paper suggests that non-conventional monetary policy easing “shocks” not only push foreign currencies higher versus the U.S. dollar, but also reduce the risk premia on foreign-currency cash and bonds. Non-conventional easing shifts the options-implied skewness of risk from dollar appreciation to depreciation, due partly to diminishing U.S. dollar funding pressure. The effects appear to be temporary, though.

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The side-effects of non-conventional monetary policy

July 30, 2016

A BIS summary of research gives a nice overview on non-conventional monetary policies and their unintended systemic consequences. Current policies appear to yield diminishing returns in terms of easier financial conditions, while their costs and side effects are increasing. This leaves markets more exposed to future negative shocks. Also, the descent into negative nominal interest rates is itself a drag on profitability and health of the financial system that erodes the effectiveness of non-conventional policies.

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Sticky expectations and predictable equity returns

July 23, 2016

New research documents that company earnings expectations of analysts have historically been sticky, plausibly reflecting that it takes time and effort to update forecasts. Such stickiness can explain two important anomalies of stock returns: price momentum and outperformance of high-profitability stocks. Indeed, these two anomalies have been correlated and stronger for stocks where analyst expectations have been stickier.

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The illiquidity risk premium

July 16, 2016

The illiquidity risk premium is an excess return paid to investors for tying up capital. The premium compensates the investor for forfeiting the options to contain mark-to-market losses and to adapt positions to a changing environment. A brief paper by Willis Towers Watson presents an approach to measure the illiquidity risk premium across assets. The premium appears to be time-variant and highest during and pursuant to financial crises.

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FX strategies based on real exchange rates

July 9, 2016

New empirical research provides guidance as to how to use real exchange rates for currency strategies. First, real exchange rates can serve as a basis for value-based strategies, but only if they are adjusted for key secular structural factors, such as productivity growth and product quality. Second, real exchange rates in conjunction with macroeconomic indicators can serve as indicators for the risk premia paid on currency positions.

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The 1×1 of trend-following

July 2, 2016

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 rising and falling prices, albeit not for range-bound and “gapping” markets. A basic trend-following algorithm is easy to build. Trend-following commands over USD300 billion in dedicated assets and a lot more are managed by informal trend-followers. The style is itself a major force of price trends, with no direct ties to fundamental asset value.

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Why fund managers share trade ideas

June 25, 2016

Through sharing research and ideas fund managers can increase both the number and quality of their trading strategies. Empirical evidence suggests that managers share ideas particularly with peers that have both the ability and the intention to provide useful feedback. This implies that portfolio managers’ communication and good intentions are critical for their success in a network of idea generation.

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Why the covered interest parity is breaking down

June 18, 2016

Deviations in the covered interest parity have become a regular phenomenon even in developed markets. Persistent gaps between on-shore and FX-implied interest rate differentials (“cross-currency basis”) can be explained by the combination of increased cost of financial intermediation in the wake of regulatory reform and global imbalances in investment demand and funding supply. They can offer information value and arbitrage opportunities for investors.

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Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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