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.
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.
The beta of an investment measures its sensitivity to “market returns”. Unlike in equity, in FX the relevant benchmark for a beta cannot be a long-only index. Instead, an FX-specific beta can be based on common types of currency strategies, such as carry and trend. Currency betas measured against such benchmarks can be valuable for portfolio construction and measuring positioning risk.
Bid-offer spreads are traditionally explained by inventory costs, operating expenses and dealers’ risk of transacting with better-informed clients. In OTC (over-the-counter) markets, however, client knowledge and market power of dealers gives rise to price discrimination in favor of clients with high volumes and sophistication. Institutional investment strategies in forwards, swaps and options that are sensitive to transaction cost must consider the institution’s standing with their market makers.
A Commerzbank paper proposes a practical way to estimate term premia across interest rate swap markets. The method adjusts conventional yield curves for median error curves, i.e. for recent tendencies of implied future yields to overpredict spot yields. The adjustment produces “neutral curves” or presumed unbiased predictors of future yields. The neutral curves can then be used to back out term premia.
China consumes half of the world’s base metal supply. Its housing market is the most metal-intensive large sector. A new quantitative study shows that China housing has been a key determinant of global metal prices during the boom of the 2000s and the bust since 2014. It is a crucial ingredient of forecasting models for directional commodity trading.
Two recent empirical studies highlight the risk that inflation expectations in the euro area are becoming de-anchored, similar to Japan. De-anchoring means that short-term price shocks can change long-term expectations. Importantly, the papers suggest medium- and short-term measures to track this de-anchoring. De-anchoring increases the risk of actual deflation and may add to the risk premia on equity and credit.
A new empirical study confirms that export price changes explain a substantial part of commodity currency fluctuations, particularly at high frequencies. More importantly, country-specific export price indices help predicting commodity countries’ future exchange rate dynamics. The predictive power appears to be most robust over a horizon of one month.
Measures of economic uncertainty help investors to track popular fear or complacency for the purpose of trading strategies. Academic papers propose various methods: keyword frequencies in news, equity market volatility, earnings forecast dispersion and economic forecast disagreements. Composite measures suggest that uncertainty typically rises abruptly but declines just gradually.
It can be rational for traders to buy with rising prices and sell with falling prices. In particular, this should be the case if traders possess private information suggesting that “something big” is coming and that prices may move significantly, even if direction is not certain (e.g. “make-or-break” situations). Experiments confirm such rational informational herding.
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.
