The dominance of price over value

October 1, 2016

Market prices reveal information about fundamental value indirectly. Private research produces information about fundamental value directly. Neither is a perfect indicator of fundamental value: the former due to non-fundamental market factors, and the latter due to limitations of private research. However, plausible theoretical research shows that overtime the information content of prices in respect to (known) fundamentals improves faster due to aggregation and averaging. When this happens investors rationally neglect their own fundamental research. This can erode information efficiency of the market and lead to sustained misalignments if the market as a whole misses key risks and value factors.

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Quantifying underlying causes of equity price changes

March 1, 2015

A paper by Greenwald, Lettau, and Ludvigson argues that short-term (quarterly) equity price fluctuation arise mainly from changes in risk aversion, while long-term trends (over decades) are heavily influenced by reallocation from labor to capital income. The latter appears to explain all the stock market gains in the U.S. since 1980.

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The power of global financial cycles

November 24, 2014
There is theoretical reason and empirical evidence for a single global financial cycle driving capital flows across a wide range of markets. Federal Reserve decisions are one major cause for this cycle, challenging the independence of monetary policy elsewhere. Catalysts of financial cycles are leveraged investors with Value-at-Risk constraints, such as banks.  One consequence is correlated risk across a wide range of leveraged investment strategies.

 

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Volatility surprises

October 12, 2014

Volatility surprises are market moves outside the scope of expected volatility. They often bring to attention an underestimated type of risk. A paper by Aboura and Chevallier suggests that these volatility surprises transmit more easily across markets than return shocks. Moreover, the arising of unpredicted risk across markets seems to be cumulative.

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Combining fundamentals- and momentum-based equity strategies

August 30, 2014

A University of York paper suggests that equity strategies based on fundamentals and strategies based on momentum are complementary. Thus, relative momentum seems to be a useful overlay for earnings growth-oriented portfolios (probably detecting when high growth companies hit a snag). And trend following has historically reduced volatility and drawdowns of both value and growth strategies.

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The Federal Reserve’s increased influence on financial markets

August 23, 2014

A new empirical study suggests that the Federal Reserve has exerted a stronger influence on fixed income, commodity, and currency markets since it started using non-conventional monetary policy. This is not because monetary policy shocks have been larger, but because their transmission has become more powerful and pervasive.

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Current accounts and foreign exchange returns

November 6, 2013

A research report by Jens Nordvig and his colleagues at Nomura shows that external (current account) surpluses have been a poor indicator of currency performance over the past 20 years. External deficits are often the consequence of growth outperformance, decreasing country risk premiums and capital inflows, and hence may be associated with currency strength rather than currency weakness.

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The rising global savings glut

October 9, 2013

A DB paper suggests that the rising median age of the world’s population will increase savings ratios. The trend is reinforced by macro policies aimed at generating external surpluses or at least restraining deficits. The onus of absorbing the resulting savings glut may fall on the United States, which issues the world’s anchor currency. Irrespective of whether it accepts that role, cost of capital for the world as a whole is likely to be compressed by the savings glut.

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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.

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Improving the information value of dividend yields

April 24, 2013

Marco Dion, Viquar Shaikh and colleagues at J.P. Morgan Cazenove illustrate how the information value of equity dividend yield can be enhanced. Their measure of “shareholder yield” integrates dividends with other forms of cash returns, i.e. share buybacks and debt redemption. They present evidence that for U.S. and European stocks the enhanced measures creates alpha for systematic trading styles.

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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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