Macrosynergy Research

Macrosynergy Research (formerly Systemic Risk and Systematic Value) is a free educational site dedicated to responsible macro trading strategies. These are alternative investment management styles based on macroeconomic and policy trends. If the right principles and ethics are applied, social and economic benefits arise from an improved information value of market prices, increased efficiency of capital allocation and reduced risk of financial crises.

Thematic collection: variance risk premium

Duration volatility risk premia

Implicit Subsidy Editor - 0
Jupyter Notebook The analysis of this post has been updated on June 22, 2023 Duration volatility risk premium means compensation for bearing return volatility risk of an...

Variance risk premia for patient investors

Implicit Subsidy Editor -
The variance risk premium manifests as a long-term difference between option-implied and expected realized asset price volatility. It compensates investors for taking short volatility...

The risk-reversal premium

Implicit Subsidy Editor -
The risk reversal premium manifests as an overpricing of out-of-the-money put options relative to out-of-the-money call options with equal expiration dates. The premium apparently...

Measures of market risk and uncertainty

Systematic Value Editor -
In financial markets, risk refers to the probability distribution of future returns. Uncertainty is a broader concept that encompasses ambiguity about the parameters of...

Realistic volatility risk premia

Implicit Subsidy Editor -
The volatility risk premium compensates investors for taking volatility risk. Conceptually it is based on the difference between options-implied and expected realized volatility. In...

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SYSTEMIC RISK

A model for bond risk premia and the macroeconomy

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An empirical analysis of the U.S. bond market since the 1960s emphasizes occasional abrupt regime changes, as defined by yield levels, curve slopes, and...

Crashes in safe asset markets

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A new theoretical paper illustrates the logic behind runs and crashes in modern safe asset markets. Safe assets are characterized by stable value and...

Copulas and trading strategies

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Reliance on linear correlation coefficients and joint normal distribution of returns in multi-asset trading strategies can be badly misleading. Such conventions often overestimate diversification...

How to manage systemic risk in asset management

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Systemic crises are rare but critical for long-term performance records. When the financial system fails, good trades become bad trades and many sensible investment...

Classifying market regimes

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Market regimes are clusters of persistent market conditions. They affect the relevance of investment factors and the success of trading strategies. The practical challenge...

SYSTEMIC VALUE

Commodity carry as a trading signal – part 2

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Carry on commodity futures contains information on implicit subsidies, such as convenience yields and hedging premia. Its precision as a trading signal improves when...

Commodity carry as a trading signal – part 1

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Commodity futures carry is the annualized return that would arise if all prices remained unchanged. It reflects storage and funding costs, supply and demand...

Sovereign debt sustainability and CDS returns

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Selling protection through credit default swaps is akin to writing put options on sovereign default. Together with tenuous market liquidity, this explains the negative...

Macro demand-based rates strategies

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Jupyter Notebook The pace of aggregate demand in the macroeconomy exerts pressure on interest rates. In credible inflation targeting regimes, excess demand should be negatively...

How to measure the quality of a trading signal

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The quality of a trading signal depends on its ability to predict future target returns and to generate material economic value when applied to...

POPULAR POSTS

The dangerous disregard for fat tails in quantitative finance

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The statistical term ‘fat tails’ refers to probability distributions with relatively high probability of extreme outcomes. Fat tails also imply strong influence of extreme...

Understanding dollar cross-currency basis

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Covered interest parity is an arbitrage condition that equalizes costs of direct USD funding and of synthetic USD funding through FX swaps. Deviations are...

VIX term structure as a trading signal

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The VIX futures curve reflects expectations of future implied volatility of S&P500 index options. The slope of the curve is indicative of expected volatility...

The importance of volatility of volatility

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Options-implied volatility of U.S. equity prices is measured by the volatility index, VIX. Options-implied volatility of volatility is measured by the volatility-of-volatility index, VVIX....

Leverage in asset management

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Asset managers can use leverage to enhance returns. Outside hedge funds, such leverage is modest as share of assets under management. However, considering the huge...

Understanding the correlation of equity and bond returns

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The correlation of equity and high grade sovereign bond returns is a powerful driver of portfolio construction and the term premia of interest rates....

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Macrosynergy Research (formerly Systemic Risk and Systematic Value) is a free educational site dedicated to responsible macro trading strategies. These are alternative investment management styles based on macroeconomic and policy trends. If the right principles and ethics are applied, social and economic benefits arise from an improved information value of market prices, increased efficiency of capital allocation and reduced risk of financial crises.

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