This study takes a global perspective in examining the most recent relationships between the worl... more This study takes a global perspective in examining the most recent relationships between the world prices of three key commodities oil, industrial and precious metals, the global stock market and the broad US dollar exchange rate. Second, it assesses the cross-asset correlation and volatility properties of these asset classes to provide practical implication for global equity portfolio managers and policy makers with respect to optimal asset allocation and hedging strategies among these markets. The research utilizes daily frequency data and is covering two periods 1) June 1, 2012 – Oct 1, 2014 and 2) Oct 1, 2014 – May 20, 2016. In terms of long-run dynamics, the empirical results from the ARDL models show that there is no longrun relationship between the five markets. However, the impulse response functions reveal short-run positive two-way interactions between the prices of oil, industrial metals, precious metals and world equity markets, and significant negative two-way interacti...
Policy is only as good as the information at the disposal of policymakers. Few moments illustrate... more Policy is only as good as the information at the disposal of policymakers. Few moments illustrate this better than the uncertainty before and after the default of Lehman Brothers and the subsequent decision to stand behind AIG. Authorities were forced to make critical policy decisions, despite being uncertain about counterparties' exposures and the protection sold against their default. Opacity has been a defining characteristic of over-the-counter derivatives markets-to the extent that they have been labelled "dark markets" (Duffie, 2012). Motivated by the concern that opacity exercerbates crises, the G20 leaders made a decisive push in 2009 for greater transparency in derivatives markets. In Europe, this initiative was formalised in 2012 in the European Markets Infrastructure Regulation (EMIR), which requires EU entities engaging in derivatives transactions to report them to trade repositories authorised by the European Securities Markets Authority (ESMA). Derivatives markets are thus in the process of becoming one of the most transparent markets for regulators. This paper represents a first analysis of the EU-wide data collected under EMIR. We start by describing the structure of the dataset, drawing comparisons with existing survey-based evidence on derivatives markets. The rest of the paper is divided into three sections, focusing on the three largest derivatives markets (interest rates, foreign exchange and credit). In Section 2, we look at interest rate derivatives, which represent around three quarters of the gross notional of all derivatives markets. The market is large because of widespread demand for interest rate risk management: as part of their business model, banks typically borrow at short maturities and lend long, while insurers and pension funds borrow long and lend short. Consistent with this hedging motive, we find that banks' interest rate derivative portfolios increase in value when interest rates rise, while those of insurers and pension funds decrease. A set of dealers, including some large banks, intermediate between end customers; these dealers therefore take small net positions vis-à-vis interest rate risk despite maintaining large gross portfolios. In Section 3, our focus shifts to credit default swaps (CDS). Unlike interest rate derivatives, few single-name CDS contracts are centrally cleared, meaning that CDSs transfer counterparty (as well as fundamental) credit risk. The market is highly concentrated: most trades relate to a few reference entities, which in turn account for a large share of gross notional. Dealers occupy the lion's share of transactions and associated net and gross notional. Overall, the dealers have a small net/gross ratio, reflecting their intermediation role. Other financial institutions (including hedge funds and mutual funds), non-financial corporations, as well as insurance and pension funds are generally net buyers of protection. Finally, in Section 4, we analyse foreign exchange derivatives. Foreign exchange derivatives, which mostly comprise forward contracts (either outright forwards or forwards as part of a swap agreement), are not centrally cleared, in contrast with many interest rate derivatives. Compared with credit derivatives, the foreign exchange derivatives market is relatively decentralised. Most trades involve at least one bank, but many of these trades take place with non-financial counterparties. FX derivatives therefore allow NFCs to hedge unwanted foreign exchange risk, and constitute a closer link between the financial system and the real economy than interest rate or credit derivatives.
This study takes a global perspective in examining the most recent relationships between the worl... more This study takes a global perspective in examining the most recent relationships between the world prices of three key commodities oil, industrial and precious metals, the global stock market and the broad US dollar exchange rate. Second, it assesses the cross-asset correlation and volatility properties of these asset classes to provide practical implication for global equity portfolio managers and policy makers with respect to optimal asset allocation and hedging strategies among these markets. The research utilizes daily frequency data and is covering two periods 1) June 1, 2012 – Oct 1, 2014 and 2) Oct 1, 2014 – May 20, 2016. In terms of long-run dynamics, the empirical results from the ARDL models show that there is no longrun relationship between the five markets. However, the impulse response functions reveal short-run positive two-way interactions between the prices of oil, industrial metals, precious metals and world equity markets, and significant negative two-way interacti...
Policy is only as good as the information at the disposal of policymakers. Few moments illustrate... more Policy is only as good as the information at the disposal of policymakers. Few moments illustrate this better than the uncertainty before and after the default of Lehman Brothers and the subsequent decision to stand behind AIG. Authorities were forced to make critical policy decisions, despite being uncertain about counterparties' exposures and the protection sold against their default. Opacity has been a defining characteristic of over-the-counter derivatives markets-to the extent that they have been labelled "dark markets" (Duffie, 2012). Motivated by the concern that opacity exercerbates crises, the G20 leaders made a decisive push in 2009 for greater transparency in derivatives markets. In Europe, this initiative was formalised in 2012 in the European Markets Infrastructure Regulation (EMIR), which requires EU entities engaging in derivatives transactions to report them to trade repositories authorised by the European Securities Markets Authority (ESMA). Derivatives markets are thus in the process of becoming one of the most transparent markets for regulators. This paper represents a first analysis of the EU-wide data collected under EMIR. We start by describing the structure of the dataset, drawing comparisons with existing survey-based evidence on derivatives markets. The rest of the paper is divided into three sections, focusing on the three largest derivatives markets (interest rates, foreign exchange and credit). In Section 2, we look at interest rate derivatives, which represent around three quarters of the gross notional of all derivatives markets. The market is large because of widespread demand for interest rate risk management: as part of their business model, banks typically borrow at short maturities and lend long, while insurers and pension funds borrow long and lend short. Consistent with this hedging motive, we find that banks' interest rate derivative portfolios increase in value when interest rates rise, while those of insurers and pension funds decrease. A set of dealers, including some large banks, intermediate between end customers; these dealers therefore take small net positions vis-à-vis interest rate risk despite maintaining large gross portfolios. In Section 3, our focus shifts to credit default swaps (CDS). Unlike interest rate derivatives, few single-name CDS contracts are centrally cleared, meaning that CDSs transfer counterparty (as well as fundamental) credit risk. The market is highly concentrated: most trades relate to a few reference entities, which in turn account for a large share of gross notional. Dealers occupy the lion's share of transactions and associated net and gross notional. Overall, the dealers have a small net/gross ratio, reflecting their intermediation role. Other financial institutions (including hedge funds and mutual funds), non-financial corporations, as well as insurance and pension funds are generally net buyers of protection. Finally, in Section 4, we analyse foreign exchange derivatives. Foreign exchange derivatives, which mostly comprise forward contracts (either outright forwards or forwards as part of a swap agreement), are not centrally cleared, in contrast with many interest rate derivatives. Compared with credit derivatives, the foreign exchange derivatives market is relatively decentralised. Most trades involve at least one bank, but many of these trades take place with non-financial counterparties. FX derivatives therefore allow NFCs to hedge unwanted foreign exchange risk, and constitute a closer link between the financial system and the real economy than interest rate or credit derivatives.
Uploads
Papers by Martin Neychev