Inventory scores are quantamental (point-in-time) indicators of the inventory states and dynamics of economies or commodity sectors. Inventory scores plausibly predict base metal futures returns due to two effects. First, they influence the convenience yield of a metal and the discount at which

While economic information undeniably wields a significant and widespread influence on financial markets, the systematic incorporation of macroeconomic data into trading strategies has thus far been limited. This reflects skepticism towards economic theory and serious data problems, such as

Regression-based statistical learning helps build trading signals from multiple candidate constituents. The method optimizes models and hyperparameters sequentially and produces point-in-time signals for backtesting and live trading. This post applies regression-based learning to macro trading

Macroeconomic trends affect stocks differently, depending on their lines of business and their home markets. Hence, point-in-time macro trend indicators can support two types of investment decisions: allocation across sectors within the same country and allocation across countries within the same

Macroeconomic trends affect stocks differently, depending on their lines of business and their home markets. Hence, point-in-time macro trend indicators can support two types of investment decisions: allocation across sectors within the same country and allocation across countries within the same

Regression is one method for combining macro indicators into a single trading signal. Specifically, statistical learning based on regression can optimize model parameters and hyperparameters sequentially and produce signals based on whatever model has predicted returns best up to a point in time.

Backtesting of macro trading strategies requires good approximate profit-and-loss data for standard derivatives positions, particularly in equity, foreign exchange, and rates markets. Practical calculation methods of generic proxy returns not only deliver valid strategy targets but are also the

The dividend discount model suggests that stock prices are negatively related to expected real interest rates and positively to earnings growth. The economic position of households or consumers influences both. Consumer strength spurs demand and exerts price pressure, thus pushing up real policy

FX forward-implied carry is a popular ingredient in currency trading strategies because it is related to risk premia and implicit policy subsidies. Its signal value can often be increased by considering inflation differentials, hedging costs, data outliers, and market restrictions. However, even

Systematic default risk is the probability of a critical share of the corporate sector defaulting simultaneously. It can be analyzed through a corporate default model that accounts for both firm-level and communal macro shocks. Point-in-time estimation of such a risk metric requires accounting data

Carry on commodity futures contains information on implicit subsidies, such as convenience yields and hedging premia. Its precision as a trading signal improves when incorporating adjustments for inflation, seasonal effects, and volatility. There is strong evidence for the predictive power of

Commodity futures carry is the annualized return that would arise if all prices remained unchanged. It reflects storage and funding costs, supply and demand imbalances, convenience yield, and hedging pressure. Convenience and hedging can give rise to an implicit subsidy, i.e., a non-standard risk

Selling protection through credit default swaps is akin to writing put options on sovereign default. Together with tenuous market liquidity, this explains the negative skew and heavy fat tails of generic CDS (short protection or long credit) returns. Since default risk depends critically on

The pace of aggregate demand in the macroeconomy exerts pressure on interest rates. In credible inflation targeting regimes, excess demand should be negatively related to duration returns and positively to curve-flattening returns. Indeed, point-in-time market information states of various macro

The quality of a trading signal depends on its ability to predict future target returns and to generate material economic value when applied to positioning. Statistical metrics of these two properties are related but not identical. Empirical evidence must support both. Moreover, there are

Real government bond yields are indicators of standard market risk premia and implicit subsidies. They can be estimated by subtracting an estimate of inflation expectations from standard yields. And for credible monetary policy regimes, inflation expectations can be estimated based on concurrent

Bank lending surveys help predict the relative performance of equity and duration positions. Signals of strengthening credit demand and easing lending conditions favor a stronger economy and expanding leverage, benefiting equity positions. Signs of deteriorating credit demand and tightening credit

Business sentiment is a key driver of inventory dynamics in global industry and, therefore, a powerful indicator of aggregate demand for industrial commodities. Changes in manufacturing business confidence can be aggregated by industry size across all major economies to give a powerful directional

Nowcasting economic trends can make use of a broad range of machine learning methods. This not only serves the purpose of optimization but also allows replication of past information states of the market and supports realistic backtesting. A practical framework for modern nowcasting is the

Pure macro(economic) strategies are trading rules that are informed by macroeconomic indicators alone. They are rarer and require greater analytical resources than standard price-based strategies. However, they are also more suitable for pure alpha generation. This post investigates a pure macro

An empirical analysis of the U.S. bond market since the 1960s emphasizes occasional abrupt regime changes, as defined by yield levels, curve slopes, and related volatility metrics. An arbitrage-free bond pricing model illustrates that bond risk premia can be decomposed into two types. One is related

Local-currency import growth is a widely underestimated and important indicator of trends in fixed-income markets. Its predictive power reflects its alignment with economic trends that matter for monetary policy: domestic demand, inflation, and effective currency dynamics. Empirical evidence

Financial markets are looking at a growing and broadening range of correlated time series for the operation of trading strategies. This increases the importance of latent factor models, i.e., methods that condense high-dimensional datasets into a low-dimensional group of factors that retain most of

Trend following can benefit from consideration of macro trends. One reason is that macroeconomic data indicate headwinds (or tailwinds) for the continuation of market price trends. This is particularly obvious in the foreign-exchange space. For example, the positive return trend of a currency is

Indicators of growth and inflation cycles are plausible and successful predictors of asset class returns. For proof of concept, we propose a single balanced “cyclical strength score” based on point-in-time quantamental indicators of excess GDP growth, labor market tightening, and excess

All other things equal, an improvement in a country’s terms of trade, the ratio of export to import prices, translates into increased demand for its currency and a boost for its growth outlook. However, terms of trade are a rather subtle and sporadic influence. Therefore, many market participants

Unlike other derivatives markets, for commodity futures, there is a direct relation between economic activity and demand for the underlying assets. Data on industrial production and inventory build-ups indicate whether recent past demand for industrial commodities has been excessive or repressed.

The recorded history of modern financial markets and macroeconomic developments is limited. Hence, statistical analysis of macro trading factors often relies on panels, sets of time series across different currency areas. However, country experiences are not independent and subject to common

The fiscal stance of governments can be a powerful force in local fixed-income markets. On its own, an expansionary stance is seen as a headwind for long-duration or government bond positions due to increased debt issuance, greater default or inflation risk, and less need for monetary policy

The Hurst exponent is a statistical measure of long-term memory of time series. The existence and form of such memory are of great interest in financial markets, as financial returns are not generally governed by random walks. The Hurst exponent is a single scalar value that indicates if a time

There are two simple ways to enhance FX carry strategies with economic information. The first increases or reduces the carry signal depending on whether relevant economic indicators reinforce or contradict its direction. The output can be called “modified carry”. It is a gentle adjustment that

Commodity futures returns are correlated across many different raw materials and products. Research has identified various types of factors behind this commonality: [i] macroeconomic changes, [ii] financial market trends, and [iii] shifts in general uncertainty. A new paper proposes to estimate the

Risk-parity positioning in equity and (fixed income) duration has been a popular and successful investment strategy in past decades. However, part of that success is owed to a supportive macro environment, with accommodative refinancing conditions and slow, disinflationary, or even deflationary

A recent paper suggests identifying financial market regimes through the correlations of asset class returns. The basic idea is to calculate correlation matrixes for sliding time windows and then estimate pairwise similarities. This gives a matrix of similarity across time. One can then perform

Employment growth is an important and underestimated macro factor of financial market trends. Since the expansion of jobs relative to the workforce is indicative of changes in slack or tightness in an economy it serves as a predictor of monetary policy and cost pressure. High employment growth is

Transaction costs are a key consideration for the development of trading strategies; and not just in final profitability checks. Indeed, disregard for trading costs at the design stage leads to excessive reliance on fleeting small-scale characteristics for return predictors. It also skews the

A new theoretical paper illustrates the logic behind runs and crashes in modern safe asset markets. Safe assets are characterized by stable value and high liquidity. In times of distress “flight for safety” increases demand for these assets, while “dash for cash” increases supply. However,

Reliance on linear correlation coefficients and joint normal distribution of returns in multi-asset trading strategies can be badly misleading. Such conventions often overestimate diversification benefits and underestimate drawdowns in times of market stress. Copulas can describe the joint

Classic trend following is based on market prices or returns. Market trends are relatively cheap to produce, popular, and plausibly generate value in the presence of behavioral biases and rational herding. Macro trends track relevant states of the economy based on fundamental data. They are more

Broad macroeconomic trends, such as inflation, economic growth, and credit creation are critical factors of shifts in monetary policy. Above-target trends support monetary tightening. Below-target dynamics give grounds for monetary easing. Yet, markets may not fully anticipate policy shifts that

Asset return volatility is typically calculated as (annualized) standard deviation of returns over a sequence of periods, usually daily from close to close. However, this is neither the only nor necessarily the best method. For exchange-traded contracts, such as equity indices, one can use open,

Duration volatility risk premium means compensation for bearing return volatility risk of an interest rate swap (IRS) contract. It is the scaled difference between swaption-implied and realized volatility of swap rates’ changes. Historically, these premia have been stationary around positive

Academic research suggests that high and rising consumer price inflation puts upward pressure on real discount rates and is a headwind for equity market performance. A fresh analysis of 17 international markets since 2000 confirms an ongoing pervasive negative relation between published CPI dynamics

Economic growth differentials are plausible predictors of foreign exchange return trends because they are related to differences in monetary policy and return on investment. Suitable metrics for testing growth differentials as trading signals must replicate historic information states. Two types of

FX forward-implied carry is a valid basis for trading strategies because it is related to divergences in monetary and financial conditions. However, nominal carry is a cheap and rough indicator: related PnLs are highly seasonal, sensitive to global equity markets, and prone to large drawdowns.

Equity convexity means that a stock outperforms in times of large upward or downward movements of the broad market: its elasticity to the market return is curved upward. Gamma is a measure of that convexity. All else equal, positive gamma is attractive, as a stock would outperform in market rallies

Predicting realized volatility is critical for trading signals and position calibration. Econometric models, such as GARCH and HAR, forecast future volatility based on past returns in a fairly intuitive and transparent way. However, recurrent neural networks have become a serious competitor. Neural

Systemic crises are rare but critical for long-term performance records. When the financial system fails, good trades become bad trades and many sensible investment strategies incur outsized losses due to deleveraging and liquidation pressure. Managers have two principal sets of tools to address

The basic idea behind factor models is that a large range of assets’ returns can be explained by exposure to a small range of factors. Returns reflect factor risk premia and price responses to unexpected changes in the factors. The theoretical basis is arbitrage pricing theory, which suggests that

The variance risk premium manifests as a long-term difference between option-implied and expected realized asset price volatility. It compensates investors for taking short volatility risk, which typically comes with a positive correlation with the equity market and occasional outsized drawdowns. A