How growing assets-under-management can compromise investment strategies

December 23, 2015

If investment funds maximize assets-under-management and end-investors allocate to outperforming funds, the investment process is compromised. A new theoretical paper suggests that asset managers may prefer portfolios with steady payouts (or steady expected mark-to-market gains) and neglect risks of rare large drawdowns, potentially leading to complete failure of parts of the options market.

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Momentum trading and setback risk

December 19, 2015

An empirical study suggests that momentum trades yield positive returns but carry higher downside than upside market risk. This “beta asymmetry” appears to be a global phenomenon across asset classes.  It is consistent with the broader observation that popular trading strategies come at the price of setback risk related to the crowdedness of positions.

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Using volatility to predict crises

December 12, 2015

A long-term empirical study finds two fundamental links between market volatility and financial crises. First, protracted low price volatility leads to a build-up of leverage and risk, making the financial system vulnerable in the medium term (Minsky hypothesis). Second, above-trend volatility indicates (and causes) high uncertainty, impairing investment decisions and raising the near-term crisis risk.

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The role of macroprudential policy

December 5, 2015

Macroprudential measures are often seen as a counterweight to ultra-easy monetary policy in the developed world. BIS research cautions against this expectation. Macroprudential policies are largely new and untested, have worked best as a complement (not offset) to monetary policy, and focus on specific sectors, such as banking and housing.

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Tracking trends in EM economies

November 28, 2015

Two recent papers provide useful techniques for “nowcasting” EM economies. The first uses “dynamic factor models” with high frequency indicators to estimate GDP growth in countries with scant and noisy data. The second uses seasonal adjustment with modifications for time-varying holidays that can track underlying trends in China and other countries with lunar year and Islamic holidays.

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The impact of the ECB asset purchase programme

November 19, 2015

ECB research suggests that its 2015 asset purchase programme significantly compressed term and credit spreads. Unlike previous asset purchases, it did not tackle financial distress. It functioned mainly through the broad compression of risk premia and spill-over to non-targeted assets.

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The short-term effects of U.S. economic data releases

November 14, 2015

A two-decade empirical study shows that bond and equity market prices are more likely to “jump” on days with U.S. economic data releases. In particular, surprises in news announcements tend to lead to higher volatility and larger price moves. The impact of key data surprises on bond markets seems clearer and simpler. The impact on equity markets depends on the state of the business cycle

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How nominal interest rates can become deeply negative

November 10, 2015

A recent IMF paper suggests that sizeable negative policy rates could be implemented in developed economies. The key would be a variable deposit fee at the central bank cash window that can enforce value decay of paper currency relative to electronic money. Despite legal and economic issues, the proposal is disconcertingly practical in light of the expansion of electronic payments. Its mere consideration would be a tail risk for fixed income markets.

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The growing concerns over market liquidity

November 7, 2015

Market liquidity accommodates securities transactions in size and at low cost. When it fails the information value of market quotes is compromised, potentially triggering feedback loops, margin calls and fire sales. With shrinking market making capacity at banks, the fragility of liquidity in both developed and emerging markets has probably increased. The rise of larger and more pro-cyclical buy-side institutions seems to enhance this vulnerability.

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How current accounts mislead FX markets

October 31, 2015

A common fallacy is that current account deficits measure dependence on external financing. In reality, external balances and cross border financing are only vaguely related. Vulnerability to “stops” in financial flows does not depend on trade and capital flows (“net concept”) but only on the volume and origin of financing (“gross concept”). Currency crises are not about current accounts that need to adjust, but about funding gaps that need to be closed.

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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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