An HKMIR paper explains benchmark index changes and shows their significant effects on mutual fund flows and international capital flows. Importantly, there is evidence for benchmark changes leading to an outperformance of upgraded assets, both at the time of announcement and the time of actual index adjustment.
A Banca d’ Italia paper reminds us that the market impact of economic data surprises depends on the state of the economy and forecast diversity. In particular, the surprise impact tends to be greater, when predictions are tightly clustered around a ‘consensus’. Conversely, uncertainty seems to help preparing markets for shocks.
Academic research explains macroeconomic information inefficiency with “stickiness” and “signal extraction problems”. Information stickiness means that forecasts cannot be updated continuously and hence markets partly operate on outdated information. Signal extraction problem means that forecasters struggle to separate noise from signal in economic data. The consequence is rational “inattentiveness” of financial markets, offering profit opportunities to those that analyze economic data timely and efficiently.
A working paper explores sources of market price trends. It suggests that small trend changes in perceptions about “fundamentals” can set in motion a persistent adjustment in transacted prices. And even without any changes to “fundamentals” or “technicals” trends are plausible.
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.
Two recent papers help understanding the information value of the implied volatility index for the S&P 500 stock index (VIX). An ECB paper de-composes VIX into measures of equity market uncertainty and risk aversion, e.g. the quantity and price of risk. Risk aversion in particular has been both a driver of monetary policy and an object of its effect. Meanwhile, a Fed paper emphasizes that the implied volatility of VIX (“vol of vol”) is a useful measure of tail risk prices and a predictor of tail risk hedges’ returns.
U.S. weekly jobless claims are a key early indicator for the U.S. economy and global financial markets. A new Kansas City Fed paper suggests that to use these data efficiently one should first estimate a time varying benchmark for the “neutral level” of claims. Claims above (below) the benchmark would indicate deterioration (improvement) of the U.S. labor market.
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.
