A central property of a complex system is the possible occurrence of coherent large-scale collective behaviors with a very rich structure, resulting from the repeated non-linear interactions among its constituents: the whole turns out to be much more than the sum of its parts.
— Didier Sornette
Within we dive into the circumstantial evidence surrounding the “weird” behavior many investors believe markets are exhibiting. We tackle narratives such as the impact of central bank intervention, the growing scale of passive / indexed investing, and asymmetric liquidity provisioning.
Spoiler: Individually, the evidence for these narratives may be nothing more than circumstantial. In conjunction, however, they share pro-cyclical patterns that put pressure upon the same latent risk: liquidity.
In the last part of the paper we discuss some ideas for how investors might try to build portfolios that can both seek to exploit these dynamics as well as remain resilient to them.
LISTEN TO THE PAPER
Central Bank Policy & Narrative Economics
Increased Risk Taking
- Procyclical Asset Management and Bond Risk Premia
- Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges
- Reaching for Yield in the Bond Market
- Does Credit Affect Stock Trading? New Evidence from the South Sea Bubble
- A New Take on Low Interest Rates and Risk Taking
Financialization & Flow
- Financialization in Commodity Markets
- Gold, the Golden Constant, COVID-19, ‘Massive Passives’ and Deja Vu
- In Search of the Origins of Financial Fluctuations: The Inelastic Market Hypothesis
- The Inelastic Market Hypothesis: A Microstructure Interpretation
- Predictable Price Pressure
- What Drives the Size and Value Factors?
- Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds
Options & Derivatives Hedging
Volatility Contingent Strategies
- Variable Annuity Volatility Management: An Era of Risk-Control
- Everybody’s Doing It: Short Volatility Strategies and Shadow Financial Insurers
- Volatility and the Alchemy of Risk: Reflexivity in the Shadows of Black Monday 1987
- The Volatility Regime
- Destabilizing Financial Advice: Evidence from Pension Fund Reallocations