Quantitative easing and “VaR shocks”

Securities held by VaR (Value-at-Risk)-sensitive institutional investors, such as banks, are prone to escalatory selling pressure after an initial shock, in particular if they...

How U.S. mutual funds reallocate assets

An empirical study shows that U.S. mutual funds take two major allocation decisions: bonds versus equity and U.S. versus non-U.S. assets. Federal Reserve policy...

Rational informational herding

It can be rational for traders to buy with rising prices and sell with falling prices. In particular, this should be the case if...

Trend chasing and overreaction in equity and bond markets

Empirical analysis suggests that equity and bond returns in international markets are driven mostly by shocks to expected future real cash flows. Moreover, they...

Understanding global liquidity

A new IMF policy paper defines global liquidity as the ease of funding in global financial markets. The concept is useful for understanding the...

How real money funds could destabilize bond markets

A paper by Feroli, Kashyap, Schoneholtz and Shin illustrates how unlevered funds can become a source of asset price momentum due to peer pressure...

Multiple risk-free interest rates

Financial markets produce more than one risk-free interest rate. This is because there are several separate market segments where structured trades replicate such a...

The asymmetry of government bond returns

Developed market government bonds are viewed as “safe havens”, but in reality they have been prone to sudden outsized price declines, similar to FX...

How fear of disaster affects financial markets

Fear of economic disasters, such as depressions, is more frequent than their actual occurrence. People tend to perceive a growing risk of disaster as...

Disaster risk and currency returns

A paper by Farhi and Gabaix explains how fear of global crisis leads to outperformance of risky versus less risky currencies. Carry trades have...

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Identifying the drivers of the commodity market

Commodity futures returns are correlated across many different raw materials and products. Research has identified various types of factors behind this commonality: macroeconomic...

Macro factors of the risk-parity trade

Risk-parity positioning in equity and (fixed income) duration has been a popular and successful investment strategy in past decades. However, part of that success...

Identifying market regimes via asset class correlations

A recent paper suggests identifying financial market regimes through the correlations of asset class returns. The basic idea is to calculate correlation matrixes for...

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