CME Flashcards
Give two advantages and disadvantages of econometric approach
- model can be quite robust, with many factors included to approximate reality
- impose discipline/consistency on analysis
- complex and time consuming to formulate
- rarely forecast turning points well
Decomposition of growth
Growth in labour inputs
* growth in potential labour force size
* growth in actual labour participation
Growth in labour productivity
* growth in total factor productivity
* growth from increasing capital inputs
exogenous shocks
policy changes
new products/technology
geo politics
natural disasters
natural resources
financial crises
Give two advantages and disadvantages of LEI approach
- primarly focus on forecasting turning points
- usually intuitive and simple in construction
- can give false signal
- history subject to frequent revision
Give two advantages and disadvantages of checklist approach
- limited complexity
- flexible : structural changes can be incorporated anytime
- arbitrary, judgmental, subjective
- time consuming
factors that raise inflation
rise in consumer confidence -> rise in consumer demand -> upward pressure on prices and inflation
decline in inventory/sales -> need to rebuild -> rise in demand for raw material -> upward pressure
positive output gap : upward pressure on prices/inflation
Implication of negative rates in CME
difficult to justify negatives rates as a “risk free rate” to which premiums should be added to establish LT equilibrium asset class returns
historical data and quant models are unreliable
effects of other MoPo occuring simultaneoulsy can distort the relationship
The Shape of the Yield Curve and the Business Cycle
Changes in the slope of the yield curve are driven primarily by the evolution of ST rate expectations (driven mainly by the business cycle and policies)
The slope of the curve may also be affected by debt management
Slope of YC = predictor of economic growth and where the economy is in BC
Give 4 Economic Risks for FI in Emerging Markets
poor fiscal controls and monetary discipline
greater concentration of wealth and income; less diverse tax base
restriction on trade, capital flows and currency conversion
less educated and less skilles work foce
Shrinkage estimator
Combining another estimate of the mean return with the sample mean
data measurement errors
transcription error
survivior bias
appraisal data
regime changes
change in technological
change in political
change in legal/regulatory
Taylor Rule
r-target = r-neutral + inflation expec+0.5(GDPexpec-GDPtrend)+0.5(inflaexpec-inflatarget)
Interest Rate/Exchange rate linkage
2 countries can share a yield curve if
1) capital flows are unrestricted
2) fixed rate is credibly fixed forever
Grinold-Kroner
E(Re)=(D/P-change of S)+change of E+change of PE
what appreciate a currency ?
lower inflation
rise in gov rate
higher GDP growth
enable FDI
current account surplus
Give 1 advantage and 1 disadvantage of sample statistic
simple
with a small sample periods, cannot be used to estimate VCV-matrix for large numbers of assets
Status quo
tendency for forecasts to perpetuate recent observations and for managers to then avoid making changes
Data mining
Repeatedly searching a data set until a statistically significant pattern emerges.
Risk of regime change
A change in regime is a shift in the technological, political, legal, economic, or regulatory environments. Regime change alters the risk–return relationship since the asset’s risk and return characteristics vary with economic and market environment
Misinterpretation of correlation
correlation relationships should not be used in a predictive model without understanding the underlying linkages between the variables.
risks faced by investors in emerging market equities over and above those that are faced by fixed income investors in such markets.
Weaker corporate governance : limited transparency, favors insiders
Weaker accounting standard
Weaker legal protection
Prudence trap
The prudence trap is the tendency to be cautious when making decisions that could be potentially expensive or damaging to the decision maker’s career.
