Understanding global liquidity

May 2, 2014

A new IMF policy paper defines global liquidity as the ease of funding in global financial markets. The concept is useful for understanding the commonality in global financial conditions, with four large financial centers dominating the world’s institutional funding. In the 2000s banks have been the main conduit of financial shock propagation, but asset managers may play a greater role in the 2010s (see also posts here, here and here).

(more…)

A theory of herding and instability in bond markets

April 26, 2014

A theoretical Bank of Japan paper suggests that instability and herding in bond markets arises from low overall confidence of investors, great importance of public information (such as central bank announcements), and high value of privileged information. This analysis goes some way in explaining drastic bond market moves in the age of quantitative easing, such as the 2013 JGB market sell-off.

(more…)

An ECB review of forward guidance

April 21, 2014

The ECB has reviewed its own forward guidance in a global context. Forward guidance uses communication [i] to add monetary accommodation at the zero bound for policy rates and [ii] to contain interest rate volatility. The ECB sees its own version as ‘form of qualitative guidance conditional on a narrative’. It is a commitment to keep policy rates very low over a flexible horizon, based on a wide array of indicators supporting a subdued inflation outlook over the medium term. This is different from the Federal Reserve or the Bank of England, which use more quantitative outcome-based forward guidance.

(more…)

A theory of information inefficiency of markets

April 19, 2014

Conventional wisdom is that markets are information efficient. Alas, a simple game-theoretical model illustrates that value traders only have an incentive to invest in research and information if (i) information cost is low enough, (ii) the overall market is sufficiently clueless, and (iii) market makers do not suspect value traders of being well informed. This leaves ample scope for the overall market to remain inefficient, even in the long run, with undesirable consequences for society as a whole.

(more…)

Global public finances: basic facts and numbers

April 18, 2014

The latest IMF fiscal monitor underscores progress in global fiscal consolidation. The structural government deficit in the developed world has been reduced by 1.2%-points to below 4% of GDP in 2013, while the public debt stock inched lower to 107% of GDP. Fiscal tightening is now becoming less aggressive in most countries, with the notable exception of Japan. Fiscal risks remain globally elevated though, due to low inflation, historically debt levels (view link here), and sizable unfunded pension liabilities.

(more…)

The trouble with (sterilized) FX interventions in emerging markets

April 5, 2014

Large foreign exchange interventions are common in emerging markets, typically in response to capital flows. What is less well understood is the expansionary (contractionary) impact of FX purchases (sales) on local credit, even if the transactions are sterilized. Sterilization securities mostly end up on banks’ balance sheets, where they function as substitutes for bank reserves, serve as collateral, and encourage banks to expand their loans-to-securities ratios.

(more…)

The structural vulnerability of local EM assets

April 4, 2014

The rapid growth in local-currency bond markets in emerging countries has transferred foreign exchange risk from local borrowers to global institutional investors and mutual funds. Gross capital inflows have soared, magnifying the dependence of flows on mutual fund holdings, particularly on volatile open-ended fixed income funds. In the wake of these changes the “beta” of local emerging market assets has risen and the tendency towards herding has increased.

(more…)

An overview of financial crisis theories

March 29, 2014

Daniel Detzer and Hansjoerg Herr deliver a superb summary of timeless economic theories of financial crisis. The main focus is on (i) escalatory inflation and deflation dynamics caused by monetary policy, (ii) boom and bust investment cycles caused by herding and inefficient expectation formation, and (iii) speculative bubbles related to cognitive behaviour that is inconsistent with efficient markets.

(more…)

The vulnerability of modern dealer bank financing

March 28, 2014

Modern dealer bank financing relies largely on collateralized transactions. In order to achieve collateral efficiency institutions engage in rehypothecation, for example through matched-book transactions, internalizing trading activities, and re-pledging of margin collateral. A New York Fed article suggests that this funding structure faces risks from rollover, credit rating downgrades, and reputational considerations.

(more…)

Tags

Tags
asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

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.

FOLLOW US
Linkedin
LEGAL
Research
Quantamental Academy
About Us