Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today's Macro Risk On / Risk Off Financial Environment

365 Pages·2013·22.09 MB·English

by  Clive M. Corcoran

Systemic
liquidity risk
and
bipolar markets
Wealth Management in Today’s
Macro Risk On/Risk Off
Financial Environment
CLIVE M. CORCORAN

Systemic Liquidity Risk
and Bipolar Markets
ForothertitlesintheWileyFinanceseries
pleaseseewww.wiley.com/finance
Systemic Liquidity Risk
and Bipolar Markets
Wealth Management in Today’s Macro Risk
On/Risk Off Financial Environment
Clive Corcoran
A John Wiley & Sons, Ltd., Publication
(cid:2)C 2013CliveCorcoran
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LibraryofCongressCataloging-in-PublicationData
Corcoran,CliveM.
Systemicliquidityriskandbipolarmarkets:wealthmanagementintodaysmacroriskon/riskofffinancial
environment/CliveCorcoran.
pagescm
Includesindex.
ISBN978-1-118-40933-6(hbk.)–ISBN978-1-118-41075-2(ebk.)–ISBN978-1-118-41076-9(ebk.)–
ISBN978-1-118-41080-6(ebk.) 1.Finance,Personal. 2.Investments. 3.Portfoliomanagement. I.Title.
HG179.C681972013
332.024–dc23 2012039741
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-1-118-40933-6(hbk)ISBN978-1-118-41075-2(ebk)
ISBN978-1-118-41076-9(ebk)ISBN978-1-118-41080-6(ebk)
Setin10/12ptTimesbyAptara,Inc.,NewDelhi,India
PrintedinGreatBritainbyCPIGroup(UK)Ltd,Croydon,CR04YY
Contents
Foreword ix
1 Introduction 1
1.1 HowHelpfulIstheNotionofTailRisk? 10
1.2 DichotomiesandAmbiguities 14
1.3 TrustandSolvencyAreAllorNothingDichotomies 14
1.4 TheAsymmetryofPrivateGainandPublicLosses 18
Endnotes 21
2 Cross-SectionalAssetCorrelations 27
2.1 LessonsforRiskManagement 35
2.2 CorrelationsandVolatility 36
2.3 IncreasedAssetCorrelations 42
2.4 StressRegressionAnalysis 45
2.5 HeatMapsIllustratetheBinaryNatureofRiskOn/RiskOff 49
Endnotes 57
3 TheChangingCharacterofFinancialMarkets 61
3.1 MarketReturnsDoExhibitMemory 66
3.2 HurstCoefficient 70
3.3 HurstValuesReachedExtremesDuring2008 72
Endnotes 75
4 TheFlashCrash 81
4.1 MarketMicrostructure 86
4.2 PredatorPreyDynamics 88
4.3 ComputerSimulationsofMarketBehavior 90
Endnotes 92
5 DetectingMiniBubbleswiththeVPINMetric 97
5.1 AdverseSelectionastheBasisfortheVPINMethod 98
5.2 TheRoleoftheJapaneseYenintheFlashCrash 110
Endnotes 116
vi Contents
6 ForeignExchangeandtheCarryTrade 119
6.1 PrimerontheForexMarket 120
6.2 TheFXCarryTrade 122
6.3 DoestheCarryTradePoseaRisktotheFinancialSystem? 123
Endnotes 129
7 TheEnigmaticPerformanceoftheJapaneseYen 133
7.1 TheNikkei225andtheYieldontheUSTreasuryTen-YearNote 137
Endnotes 146
8 TheAussie/YenConnection 149
8.1 TheRoleofAussie/YeninInter-MarketStrategies 157
Endnotes 162
9 PrecursorstoIlliquidity 165
9.1 UsingHeatMapsforFXandOtherAssetCorrelations 166
Endnotes 174
10 MainstreamFinancialEconomicsGropingTowardsaNewParadigm 175
10.1 DisappearanceofIncome 176
10.2 VendorFinancing 183
10.3 GlobalImbalancesandtheMartinWolfThesis 183
10.4 ProjectEvaluationandtheCostofCapital 186
10.5 TowardsaNewParadigminEconomicThinking 187
10.6 RationalandEfficientMarkets 190
Endnotes 194
11 CouldaEurozoneBreakupTriggerAnotherSystemicCrisis? 201
11.1 TheEuropeanStabilityMechanism(ESM) 209
11.2 ImpactofMonetaryUnion 211
11.3 TheDebtDeflationTrapintheEurozone 214
11.4 Eurobonds 218
11.5 TheVisceralDimensiontotheEurozone’sProblems 221
Endnotes 222
12 China,Commodities,andtheGlobalGrowthNarrative 227
12.1 ChineseConsumptionofBaseMetals 235
12.2 TheInternationalizationoftheRenminbi 243
Endnotes 246
13 DrawdownsandTailRiskManagement 251
13.1 ProtectingAgainstDrawdowns 260
13.2 TheTailRiskProtectionBusiness 265
13.3 RaisingCashandSwitchingtoSafeHavenAssets 267
13.4 ImplementingDrawdownProtectionStrategies 270
13.5 TailRiskProtectionfromOutrightFXPositions 273
Endnotes 279
Contents vii
14 LiquidityandMaturityTransformation 285
14.1 MoneyMarketSpreads 291
14.2 Liquidity 294
14.3 RepoFinancingastheSafestFormofIntervalConfidence 295
14.4 TowardsNewModelsofNetworkorSystemicRisk 298
14.5 TheShadowBankingSystemandLiquidityRisk 299
14.6 MaturityTransformationIsSpanninganInterval 299
Endnotes 302
15 EmotionalFinanceandIntervalConfidence 307
15.1 ConstructiveAmbiguity 308
15.2 DoubleBindsandEmotionalFinance 311
15.3 PatienceandInvestmentDecisionMaking 318
Endnotes 320
16 AdjustingtoMoreCorrelatedFinancialMarkets 327
16.1 SomeFinalMusingsonMarketsandMayhem 331
Endnotes 334
Appendix 337
Index 343