Inefficient benchmarking and trading opportunities

March 25, 2016

Academic research explains how benchmarking induces investment managers to buy overvalued highly volatile assets. This makes markets inefficient and may even lead to a negative relation between risk and return. It also offers opportunities for investment strategies. First, value investors can exploit the market’s proclivity to overvalue high-beta and high-volatility assets. Second, momentum traders can exploit the flows of funds in the benchmarked industry.

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How to measure economic uncertainty

March 19, 2016

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.

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Rational informational herding

February 27, 2016

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.

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EM exchange rates and self-reinforcing trends

February 6, 2016

Emerging market exchange rates can be catalysts of self-reinforcing trends. Currency appreciation raises both global lenders’ risk limits and EM institutions’ debt servicing capacity. Currency depreciation spurs the reverse dynamics. Their escalatory potential constrains central banks’ tolerance for exchange rate flexibility.

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The risks in statistical risk measures

January 16, 2016

A DNB paper warns that financial market risk models (such as value-at-risk or expected shortfall) are unreliable. Small variations in assumptions cause large differences in risk forecasts. At commonly used small samples of data forecasts are close to random noise. It would take half a century of daily data for estimates to reach their theoretical asymptotic properties.

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The secular decline in the global equilibrium real interest rate

January 2, 2016

A new Bank of England paper finds a 450 bps decline in global equilibrium real interest rates over the past 35 years, due to a fundamental divergence: savings preferences surged on demographics, inequality and EM reserve accumulation, while investment spending was held back by cheapening capital goods and declining government activity. More recently, fear of secular stagnation has compounded the real rate compression.

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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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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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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
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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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