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1 – 10 of 325Alexandre Nguyen and Mathieu Roberge
The purpose of this study is to examine the pertinence of combining the positioning along the US presidential election cycle and the inversions of the yield curve as a guide for a…
Abstract
Purpose
The purpose of this study is to examine the pertinence of combining the positioning along the US presidential election cycle and the inversions of the yield curve as a guide for a market timing strategy on the S&P 500. These variables provide warning signals for either an abnormally high probability of tighter future economic conditions or an abnormally high probability of more accommodative future economic conditions, not both. As such, they represent natural complement.
Design/methodology/approach
The combination of the two variables leads to four scenarios: inverted yield curve or not and first half or second half of the presidential cycle. Two timing strategies are proposed to act on these scenarios: the “type T” strategy for Traditional investors not allowed to sell short and focusing on active risk focus and the “type H” strategy for Hedge Fund‐like investors focusing on absolute risk.
Findings
Compared to a buy‐and‐hold investment in the S&P 500, the “type H” version increases the return per unit of risk from 0.81 to 1.10 and the “type T” delivers an annualized information ratio of 0.62. Robustness tests show that the strategy adds value under both specifications in the majority of 1‐, 3‐ and 10‐year sub‐periods. Application of the Henriksson‐Merton test confirms that the two strategies have a genuine market timing ability.
Originality/value
While the predictive variables have been investigated on a standalone basis, the idea of combining these two predictors is new. The idea of examining market timing from the perspective of both traditional investor and hedge fund like investor is also original.
Details
Keywords
The purpose of this paper is to present an empirical analysis of the European Central Bank (ECB) deposit rate dynamics during 2014–2020, attempting to answer how deep could be cut…
Abstract
Purpose
The purpose of this paper is to present an empirical analysis of the European Central Bank (ECB) deposit rate dynamics during 2014–2020, attempting to answer how deep could be cut further this rate without causing persistent yield curve inversions (YCI), i.e. lower yields for longer terms. It addresses the sustainability of the traditional banking and shows that inverted yield curves would require changing the banking-as-usual model to the government-guaranteed long-term-borrowing coupled with short-term-lending. This research poses the question of whether the banking sector should become a public utility.
Design/methodology/approach
The future scenarios of negative interest rate (NIR) behavior are modeled seeking to increase the understanding of NIR environment. Using an event-study design, empirical analyses of the ECB deposit rate cuts on the Euro Over-Night Index Average rates is performed at different maturities.
Findings
This study finds that, starting from the lower limit of 80 basis points below zero, the ECB deposit rate is likely to result in complete YCIs.
Social implications
This paper evidences that moving rates into a more negative territory is likely to be completely counterproductive for banking industry, implying that banking at such conditions would become heavily dependent on governmental support. The results shed light on the interdependence of the banking business, financial monetary policy and welfare of the society, providing policymakers with empirically defined milestones for policy implementations.
Originality/value
This paper clarifies the impact of the ECB deposit rate on the overall shape of yield curves. The novelty of this research resides in investigation of YCI by simulating NIR dynamics.
Details
Keywords
- Monetary policy
- Financial risk and risk management
- Determination of interest rates
- Policy designs and consistency
- Simulation modeling
- Term structure of interest rates
- ECB deposit rate
- EONIA
- Negative interest rates
- Financial economic policy
- Financial market regulators
- Banks
- Yield curve inversion
- Reversal rate
- Sustainability
- Coronavirus policy tools
- Financial markets and institutions
- E43
- E44
- E52
- E58
- G12
- G20
Predicting recessions.
Details
DOI: 10.1108/OXAN-DB241723
ISSN: 2633-304X
Keywords
Geographic
Topical
Surging energy prices, and the prospect of sharply higher food prices if grain exports from Russia and Ukraine are curtailed, are stoking fears that inflation will run far higher…
Details
DOI: 10.1108/OXAN-DB267655
ISSN: 2633-304X
Keywords
Geographic
Topical
Prospects for the US economy in 2020.
Details
DOI: 10.1108/OXAN-DB247934
ISSN: 2633-304X
Keywords
Geographic
Topical
UNITED STATES: Inverted curve could upset Trump plan
The Fed insists that subsequent moves will depend on economic developments, but its forecast implies that, although not imminent, another 25-basis-point (bp) increase will happen…
Details
DOI: 10.1108/OXAN-DB282113
ISSN: 2633-304X
Keywords
Geographic
Topical
INTERNATIONAL: US, China and Europe outlooks diverge