CME Flashcards
Initial recovery
Inflation - declining
Economic policy - stimulative
Short term rates low or declining
Long term rates bottoming
Stock price increasing
Early expansion
Low inflation and good economic growth
Becoming less stimulative
Short term rates increasing
Long term rates bottoming or increasing
Late expansion
Inflation increasing
Becoming restrictive
Short and long term rates increasing
Slowdown
Inflation continues accelerating
Becomes less restrictive
Short and long term rates peaking and then declining
Contraction
Monetary policy - easing
Short term and long term rates declining with bond prices increasing
Econometric analysis
Uses statistical methods to explain economic relationships and formulate forecasting models
Checklist approach
An analyst considers a series of questions
Then he uses judgement and perhaps statistical modeling to interpret answers
Checklist approach
An analyst considers a series of questions
Then he uses judgement and perhaps statistical modeling to interpret answers
Rules of immunizing a single liability
- Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for more complex situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
- Portfolio Macaulay duration matches the due date of the liability (D = DL).
- Minimize portfolio convexity (to minimize dispersion of asset cash flows around the liability and reduce risk to curve reshaping).
- Regularly rebalance the portfolio to maintain the duration match as time and yields change. (But also consider the tradeoff between higher transaction costs from morefrequent rebalancing versus the risk of allowing durations to drift apart.)
Rules of immunizing multiple liabilities
- Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for some situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
- Portfolio and liability basis point values match (BPV = BPVL)
- Asset dispersion of cash flows and convexity exceed those of the liabilities. (But not by too much, in order to minimize structural risk exposure to curve reshaping).
- Regularly rebalance the portfolio to maintain the BPV match of A and L as time and yields change.
What’s shrinkage estimation
Shrinkage estimation involves taking a weighted average of a historical estimate of a parameter and some other parameter estimate, in which the weights reflect the analyst’s relative belief in the estimates.
Deficit to GDP ratio
Shouldn’t be more than 4%
Debt to GDP ratio
But more than 70-80%
Real growth rate
More than 4%
Current account deficit
Not more than 4%