A simple rule for exchange rate trends

June 2, 2018

Over the past decades developed market exchange rates have displayed two important regularities. First, real exchange rates (nominal exchange rates adjusted for domestic price trends) have been mean reverting. Second, the mean reversion has predominantly come in form of nominal exchange rate trends. Hence, a simple rule of thumb for exchange rate trends can be based on the expected re-alignment the real exchange rates with long-term averages over 2-5 years. According to a new paper, FX trend forecasting models based on this rule outperform both the random walk and more complex forecasting models.

(more…)

Overconfidence and inattention as asset return factors

January 20, 2018

Overconfidence in personal beliefs and inattention to new trends are widespread in financial markets. If specific behavioural biases become common across investors they constitute sources of mispricing and – hence – return factors. Indeed, overconfidence and inattention can be quantified as factors to an equity market pricing model and seem to capture a wide range of pricing anomalies. This suggests that detecting sources of behavioural biases, such as attachment to ideological views or laziness in the analysis of data, offers opportunities for systematic returns.

(more…)

Policy rates and equity volatility

January 13, 2018

Measures of monetary policy rate uncertainty significantly improve forecasting models for equity volatility and variance risk premia. Theoretically, there is a strong link between the variance of equity returns in present value models and the variance short-term rates. For example, there is natural connection between recent years’ near-zero forward-guided policy rates and low equity volatility. Empirically, the inclusion of derivatives-based measures of short-term rate volatility in regression forecast models for high-frequency realized equity volatility has added significant positive predictive power at weekly, monthly and quarterly horizons.

(more…)

Monetary policy stance in one indicator

November 25, 2017

New research proposes to condense policy rates and balance sheet actions into a single implied short-term interest rate. To this end the term premium component of the yield curve is estimated and its compression translated into an equivalent change in short-term interest rates. This implied short-term rate can be deeply negative and allows calculating long time series of the monetary policy stance including times before and after quantitative easing. It is only suitable for large currency areas, however. Indicators of smaller open economies should include the exchange rate as well, as part of an overall monetary conditions index.

(more…)

How to use financial conditions indices

October 14, 2017

There are two ways to use financial conditions indicators for macro trading. First, the tightening of aggregate financial conditions helps forecasting macroeconomic dynamics and policy responses. Second, financial vulnerability indicators, such as leverage and credit aggregates, help predicting the impact of an initial adverse shock to growth or financial markets on the subsequent macroeconomic and market dynamics. The latest IMF Global Financial Report has provided some clues as to how to combine these effects with existing economic-financial data.

(more…)

The latent factors behind commodity price indices

October 7, 2017

A 35-year empirical study suggests that about one third of the monthly changes in a broad commodity price index can be attributed to a single global factor that is related to the business cycle. In fact, for a non-fuel commodity basket almost 70% of price changes can be explained by this factor. By contrast, oil and energy price indices have been driven mainly by a fuels-specific factor that is conventionally associated with supply shocks. Short-term price changes of individual commodities depend more on contract-specific events, but also display a significant influence of global and sectoral factors. The latent global factor seems to help forecasting commodity index prices at shorter horizons.

(more…)

Hedging FX trades against unwanted risk

September 23, 2017

When FX forward positions express views on country-specific developments one can shape the trade to its rationale by hedging against significant unrelated global influences. Almost all major exchange rates are sensitive to directional global market moves and USD-based exchange rates are typically also exposed to EURUSD changes. A simple empirical analysis for 29 currencies for 1999-2017 suggests that the largest part of these influences has been predictable out-of-sample and hence “hedgeable”. Even volatility-adjusted relative positions across EM or FX carry currencies may sometimes be hedged against market directional influences.

(more…)

Treasury yield curve and macro trends

September 2, 2017

There is a strong logical and empirical link between the U.S. Treasury yield curve and long-term economic trends, particularly expected inflation and the equilibrium short-term real interest rate. Accounting for variations in these two trends allows isolating cyclical factors in a non-arbitrage term structure model. Put simply, interest rates mean-revert to a ‘shifting endpoint’ that is driven by macroeconomics. According to new research, term structure models that include long-term macro trends substantially improve yield forecasts for the medium term as well as predictions of bond excess returns.

(more…)

The demographic compression of interest rates

August 5, 2017

Declining population growth and rising dependency ratios in the developed world have been one key factor behind the decline in nominal and real interest rates since the 1980s. Personal savings for retirement are growing, while investment spending is not rising commensurately, and long-term economic growth is dampened by slowing or even shrinking work forces. A new ECB paper suggests that for the euro area these trends will likely continue to compress interest rates for another 10 years, a challenge for monetary policy and financial stability.

(more…)

What traders can learn from market price volatility

July 1, 2017

Equity and bond market volatility can be decomposed into persistent and transitory components by means of statistical methods. The distinction is relevant for macro trading because plausibility and empirical research suggest that the persistent component is associated with macroeconomic fundamentals. This means that persistent volatility is an important signal itself and that its sustainability depends on macroeconomic trends and events. Meanwhile, the transitory component, if correctly identified, is more closely associated with market sentiment and can indicate mean-reverting price dynamics.

(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