The interconnectedness across risk appetite of distinct investor types in Borsa Istanbul

PurposeThis study aims to investigate the interconnectedness across the risk appetite of distinct investor types in Borsa Istanbul. This study also examines the causal impact of global implied volatility indices on the risk appetite of these investor groups.Design/methodology/approachThe authors use a novel time-varying frequency connectedness framework of Chatziantoniou et al. and a new time-varying Granger causality test with a recursive evolving procedure by Shi et al. over June 2008 and July 2022.FindingsThe results show a high level of interconnectedness across the risk appetite of different investor types. The sizable spillovers to domestic types of investors either occur from professional or foreign investors, indicating the long-term dominant effect of foreign and more qualified investors on the domestic investors in Borsa Istanbul. The authors provide significant evidence of causality from the global implied volatility to the Borsa Istanbul risk appetite indices, which are getting stronger after the COVID-19 outbreak.Originality/valueUnlike the previous studies, the authors analyze the risk appetite sub-indices of various types of investors to reveal behavioral distinctions and interconnectedness across them. The authors use a novel econometric framework to assess investors' risk appetite in different investment horizons in a time-varying system. Together with volatility index (VIX), the authors also use volatilities of oil (OVX), gold (GVZ) and currency (EVZ), considering the information transmission not only from stock markets but also energy, metals and currency markets. The present data set covers significant financial crises, socioeconomic events and the COVID-19 outbreak.

Economic Sanctions During Humanitarian Emergencies: The Case of North Korea

summary North Korea is experiencing yet another cycle of humanitarian distress. While sanctions are not the primary cause, they are a contributing factor. This essay examines the channels through which sanctions affect the North Korean economy and reaches four conclusions: First, sanctions have contributed to a deterioration of economic performance. Second, the UNSC's 1718 Sanctions Committee should consider a thorough review to identify goods that would warrant blanket humanitarian financial sanctions have raised the risk premium on all financial transac-tions with North Korea;the sanctioning authorities need to do a better job of clarifying transactions permissible under humani-tarian exemptions. Finally, while the global community should reassess its policies, the government of North Korea bears respon-sibility as well. The benefits of sanctions relief will be diminished if North Korea refuses to engage constructively with the tional on a broader range of issues running from basic humanitarian relief to economic reform. Analysis

Can Ensemble Machine Learning Methods Predict Stock Returns for Indian Banks Using Technical Indicators?

This paper develops ensemble machine learning models (XGBoost, Gradient Boosting, and AdaBoost in addition to Random Forest) for predicting stock returns of Indian banks using technical indicators. These indicators are based on three broad categories of technical analysis: Price, Volume, and Turnover. Various error metrics like Mean Absolute Error (MAE), Mean Squared Error (MSE), Mean Absolute Percentage Error (MAPE), Root-Mean-Squared-Error (RMSE) have been used to check the performance of the models. Results show that the XGBoost algorithm performs best among the four ensemble models. The mean of absolute error and the root-mean-square -error vary around 3–5%. The feature importance plots generated by the models depict the importance of the variables in predicting the output. The proposed machine learning models help traders, investors, as well as portfolio managers, better predict the stock market trends and, in turn, the returns, particularly in banking stocks minimizing their sole dependency on macroeconomic factors. The techniques further assist the market participants in pre-empting any price-volume action across stocks irrespective of their size, liquidity, or past turnover. Finally, the techniques are incredibly robust and display a strong capability in predicting trend forecasts, particularly with any large deviations.

U.S. DEBT SUSTAINABILITY UNDER LOW INTEREST RATES AND AFTER THE COVID-19 SHOCK

[...]the Committee for a Responsible Federal Budget (2021) has consistently been among the most vocal critics of the outlook for rising public debt. [...]Treasury Secretary Janet Yellen stated in 2017 that the United States was on an "unsustainable debt path," and in confirmation hearings, she reiterated that "there are long-term budget challenges" (Yellen 2021: 26). Even though in principle the United States could always inflate away its real debt because it borrows in its own currency, the prospect of a need to do so would widen the inflation risk premium. [...]because of likely political intolerance to inflation high enough to make a sharp reduction in outstanding real debt, financial markets could begin to incorporate a credit-default risk premium. The primary (noninterest) fiscal surplus needed to keep the debt to GDP ratio from rising, as a fraction of GDP, turned out to be the real interest rate minus the real growth rate, multiplied by the initial ratio of debt to GDP, and all divided by unity plus the real growth rate plus inflation.3 With low real interest rates equal to or less than the growth rate, the principal policy inference has been that public debt is not much of a problem.4 Cline (2021, Appendix A) sets forth the basic equations of the "r - g" debt dynamics. Treasury Inflation-Protected Securities (TIPS) were not introduced until the late 1990s, and data series on 10-year TIPS only begin in 2003. [...]TIPS account for only about 9 percent of outstanding debt (CBO, pub. 56165: 6).

LA POLÍTICA MONETARIA EN LA EUROZONA ANTE LA COVID-19 (*)

En este artículo se describe la rápida, flexible y eficaz actuación del BCE y sus efectos sobre la estabilidad financiera de la eurozona, como respuesta a la COVID-19. Para ello se revisan las principales medidas adoptadas por el BCE y sus resultados sobre las variables macroeconómicas y mercados financieros. La evidencia muestra que el tensionamiento en el mercado monetario al inicio de la pandemia fue reducido y transitorio, los gobiernos de los países de la eurozona han tenido abiertos los mercados y se han financiado a tipos y primas de riesgo muy reducidos -a pesar del fuerte incremento del déficit público-, los diferenciales de los bonos corporativos volvieron rápidamente a sus niveles previos, al igual que las primas de riesgo bancario, y el crédito ha seguido fluyendo a la economía. Todo ello pone de manifiesto que se evitó un grave accidente financiero en la zona del euro, así como la reaparición del riesgo de ruptura del euro que habría sido especialmente dañino para los países periféricos. La evaluación del impacto directo sobre la economía real de las medidas extraordinarias del BCE indica que su efecto ha sido económicamente relevante. En el caso concreto de España, se estima que han evitado al menos una caída adicional del PIB superior a 3 puntos porcentuales, a lo que hay que añadir los efectos indirectos, al hacer posible la adopción de medidas fiscales de ámbito nacional, con un impacto de unos 8 puntos porcentuales en los momentos más álgidos de la crisis.Alternate :This article describes the rapid, flexible and effective measures taken by the ECB and its effects on the financial stability of the euro area, in response to COVID-19. To this end, we review the main measures adopted by the ECB and their results on macroeconomic variables and financial markets. The evidence shows that financial tensions at the beginning of the pandemic were small and transitory, governments have had public debt markets open and have faced very low rates and risk premiums -despite the strong increase in the public deficit-, corporate bond spreads quickly returned to their previous levels, as did bank risk premiums, and credit has continued to flow into the economy. All of this evidence shows that the eurozone avoided a serious financial recession, as well as the reappearance of the risk of a breakdown of the euro, which would have been especially damaging for peripheral countries. The evaluation of the direct impact on the real economy of the measures taken by the ECB during the pandemic indicates that their effect has been economically relevant. In the specific case of Spain, we estimate that they have avoided at least an additional fall in GDP of more than 3 percentage points. Indirect effects should be added to this direct effect of monetary policy, by making it possible to adopt fiscal measures at the national level, with an impact of about 8 percentage points at the height of the crisis.

Workhorse or Trojan Horse? The Alternative Risk Premium Conundrum in Multi-Asset Portfolios

Diversified alternative risk premium (ARP) portfolios seek to generate absolute returns using a broad range of systematic trading strategies incorporating multiple investment styles covering all the major asset classes. Against a backdrop of low developed market bond yields and fully valued equities, ARP offered a reasonably priced combination of low correlation with traditional asset classes, attractive expected Sharpe ratio, and reasonable liquidity. Following a period of rapid adoption, disappointing performance over the 2018–2020 period has produced considerable soul searching regarding the role of ARP in institutional portfolios. Should these strategies remain a candidate for multi-asset portfolios, or is the experience of the past years a death knell regarding their usefulness? To examine this very topical issue, in this article, the authors use a unique array of benchmarks leveraging a proprietary database of 2,000 tradable bank indexes. They evaluate whether recent returns are consistent with long-term expectations. In the process, they consider the extent to which unique environmental headwinds and a lack of true breadth across ARP strategies contributed to this outcome.

Do Commodities React More to Time-Varying Rare Disaster Risk? A Comparison of Commodity and Financial Assets

Using a rare disaster risk database from almost the last one hundred years, we examine the differences in the reaction of asset prices to rare disaster risk between commodity and financial assets. We first employ time-varying parameter VAR (TVP-VAR) models to investigate the role of rare disaster risk in the price dynamics of major asset markets. The results indicate that disaster risk generally has a more intense and persistent impact on crude oil and stock markets when compared to gold and bond markets. However, the role of rare disaster risk differs substantially between commodity and financial assets, as well as between the short and long term. Moreover, when using a nonparametric causality-in-quantiles method to detect causal relationships, we provide evidence of the nonlinear causality effect of rare disaster risks on asset volatilities, and not their returns, except for crude oil. In addition, we demonstrate that augmenting a diversified portfolio of stock or bonds with gold can significantly increase its risk-adjusted performance. The findings have important implications for investors as well as policymakers.

Is quantitative easing good policy?

This paper asks whether the suite of unorthodox monetary policies (including quantitative easing, or QE) really make sense in the presence of a global liquidity trap. It finds that QE-type policies are an expedient remedy for short-term crisis management, but their ongoing and expanded use have distorted global markets and will have significant dynamic efficiency costs over the next decade. The alternative is for discretionary fiscal policy to play a bigger role in stabilisation, with monetary policy left to accommodate. Both policies should be operated by a single agency accountable to the electorate.

The Time-Varying Relation between Stock Returns and Monetary Variables

The nature of the relation between stock returns and the three monetary variables of interest rates (bond yields), inflation and money supply growth, while oft studied, is one that remains unclear. We argue that the nature of the relation changes over time, and this variation is largely driven by shocks, with a change in risk associated with each variable shifting the pattern of behaviour. We show a change in the correlation between each of the three variables with stock returns. Notably, a predominantly negative correlation with bond yields and inflation becomes positive, while the opposite is true for money supply growth. The shift begins with the bursting of the dotcom bubble but is exacerbated by the financial crisis. Results of predictive regressions for stock returns also indicate a switch in behaviour. Predominantly negative predictive power switches temporarily to positive around economic shocks. This suggests that higher yields, inflation and money growth typically depress returns but support the market during periods of stress. However, after the financial crisis, higher inflation and money growth exhibit persistent positive predictive power and suggest a change in the risk perception of higher values.