Some stylized facts of FX liquidity

October 28, 2013

A paper of the University of St. Gallen shows that foreign exchange liquidity has been highly correlated across currency pairs, apparently more so than in equity markets. Liquidity correlation has been strongest in developed FX markets and particularly in volatile currency pairs. Bond and equity markets seem to have a bearing on systematic FX liquidity. Feedback loops between market illiquidity and funding constraints can escalate into fire sales. Riskier currency pairs, and particularly those related to carry trades, are more susceptible to liquidity shocks.

(more…)

Liquidity regulation and monetary policy

October 24, 2013

From 2015 banks will have to satisfy new liquidity standards. Of particular importance is the liquidity coverage ratio, which requires institutions to hold enough “high quality liquid assets” to withstand a 30-day period of funding stress. This will complicate the conduct of monetary policy and affect short-term yield curves, which will probably price some regulatory term premium.

(more…)

Dealer balance sheets and market liquidity

October 17, 2013

Even in a huge market like U.S. fixed income, dealer balance sheet management these days can impair liquidity. New Federal Reserve research suggests that during the 2013 treasury sell-off dealers reduced their own positions rather than absorbing client flows and decided to limit their market making.

(more…)

Risk premia strategies

September 24, 2013

Risk premia strategies can be defined as diversifiable investment styles with fundamental value and positive historic returns. Their main types are (i) absolute value and carry, (ii) momentum, and (iii) relative value. A Societe Generale research report argues that value generation of these styles may be more reliable than that of asset classes and more suitable for combination into diversified portfolios.

(more…)

The dangers of leveraged ETFs

August 13, 2013

Leveraged Exchange Traded Funds have become a significant factor in the U.S. equity market. According to a new Federal Reserve discussion paper their mechanical rebalancing rules can reinforce or even escalate large directional moves in the stock market, both through their own transactions and other market participants’ front running.

(more…)

Fire sale risk through the U.S. repo market

July 18, 2013

The Federal Reserve Bank of New York continues to highlight the latent risk of fire sales in the tri-party repo market. The danger arises from an incentive to liquidate collateral in case the solvency of a dealer is in doubt. The risk is enhanced by the vulnerability of the main cash lenders intri-party repos, money market mutual funds and security lenders, to liquidity pressure. Policy tools to contain such an event are limited.

(more…)

Why CDS spreads can decouple from fundamentals

July 16, 2013

A Bundesbank working paper provides evidence that Credit Default Swap (CDS) spreads change significantly in accordance with (i) the direction of order flows, (ii) the size of transactions, and (iii) the type of counterparty. Apparent causes are asymmetric information, inventory risk and market power. The implication is powerful. Since transactions do not require commensurate changes in fundamentals and since CDS spreads are themselves used for risk management, institutional order flows can easily establish escalatory dynamics.

(more…)

Metals price distortions and the warehouse system

July 6, 2013

In a short note Macquarie’s commodity research reviews price distortions and prospective changes related to the warehouse system of the London Metals Exchange (LME). Since 2008 LME warehouses have effectively withdrawn over 4 million tons of aluminium from the physical markets, producing a record premium for physical delivery versus exchange spot prices. Premiums have also climbed for other metals. A future increase in mandatory load-out rates could compress premiums but also adds to uncertainty about the resulting adjustment in exchange prices.

(more…)

Overshooting of U.S. Treasury yields

June 17, 2013

The U.S. rates research team of Bank of America/Merrill Lynch reasons that fears of less accommodative monetary policy can trigger a rise in U.S. Treasury yields that goes beyond the rationally expected path in fed funds rates. Catalysts of such non-fundamental dynamics can be (i) increased mortgage convexity risk, (ii) spillovers and repercussions from other bond markets, and (iii) duration hedging in the wake of bond fund outflows. Thereby, large institutional flows in a market with few players to warehouse risk can lead to an overshooting of yields.

(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