(total reading time: 3 mins)
Given my two decades worth of research on exchange rates I was intrigued by this new ECB paper looking at which FX valuation models work best. Their results confirm the work I’ve done on valuations – that simplicity is best. Take a read of my summary of the paper for the details.
For our second Deep Dive, we summarise another ECB paper. This time on what determines a country’s bond market being viewed as a safe asset. It’s very comprehensive, looking at DM and EM markets and doesn’t bode well for China’s bonds being viewed as a safe haven. Full summary below.
Which FX Valuation Models Work Best? (5 min read) While most markets like equities and bonds have well-established valuation models, FX markets often baffle people. What anchors the value of a currency? Well, there are a number of valuation approaches: Purchasing Power Parity (PPP), Behavioural Equilibrium Exchange Rate (BEER), and the Macroeconomic Balance (MB). But which is best? A new ECB paper, The predictive power of equilibrium exchange rate models, puts these three to the test. It finds that the simplest, PPP, is probably the winner, while the more complex and much favoured MB is the least useful.
(Bilal Hafeez│22nd January, 2020)
Why Are Some Bonds Safe Assets And Others Not? (3 min read) Safe assets have been all the rage since the financial crisis. They’re in high demand as collateral in repo transactions, for use to meet regulatory requirements, and, of course, as protection during bouts of market turbulence. In response to this trend, the ECB recently published a paper on their determinants, The fundamentals of safe assets. The authors, Maurizio Michael Habib, Livio Stracca, and Fabrizio Venditti ask what makes some country’s bonds safe assets while others more risky?
(Stefan Posea│22nd January, 2020)
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